Dissolution is the legal process by which a company is removed from the Companies House register and ceases to exist as a separate legal entity.
Whether a company is closed voluntarily by its shareholders, removed following a strike-off application or dissolved after a formal liquidation process, the result is broadly the same: once dissolved, the company no longer exists in law and cannot continue trading, own assets or enter into contracts.
Whilst dissolution is often the final stage in a company's lifecycle, there are circumstances in which a company may be restored to the register if it should not have been dissolved or if a third party has a legitimate interest in bringing it back into existence.
If you require specialist advice regarding the closure, dissolution or restoration of a company, it is important to seek legal advice as early as possible.
Dissolved Companies
A company that has been removed from the Companies House register no longer exists as a separate legal entity. Although its historic filings and records ordinarily remain available for public inspection, the register will clearly record that the company has been dissolved.
Dissolution commonly follows:
- A voluntary strike-off application;
- A members' voluntary liquidation;
- A creditors' voluntary liquidation; or
- A compulsory liquidation following a court order.
It is important to distinguish between strike-off and liquidation.
A voluntary strike-off is generally appropriate where a company has ceased trading, has no outstanding liabilities and has completed its affairs. Liquidation, by contrast, is a formal insolvency or winding-up process used where a company's financial affairs require formal administration and, in some cases, where creditors need protection.
The fact that a company has been dissolved does not necessarily mean that it was insolvent. Many profitable businesses are dissolved because their owners retire, reorganise their affairs or simply decide to cease trading.
For further guidance on the company strike-off process and alternative closure options, please see our related article on closing a limited company.
What Are the Consequences of Dissolution?
Once dissolved, a company can no longer trade because it no longer exists in law. Any assets remaining in the company's name at the point of dissolution may pass to the Crown as bona vacantia. This can include bank account balances, property, intellectual property rights and other assets. Such assets vest automatically in the Crown and, in practice, usually cannot be recovered unless and until the company is restored to the register.
Accordingly, directors should ensure that all assets are properly dealt with before a company is removed from the register.
Directors should also exercise caution where debts or liabilities remain outstanding. Creditors are entitled to object to a proposed strike-off and may take steps to prevent the company from being dissolved. In certain circumstances, regulators and enforcement authorities may also investigate whether the dissolution process has been used improperly to avoid liabilities.
What Happens to Directors?
Following dissolution, former directors cease to owe ongoing duties to the company and are no longer able to exercise any authority on its behalf.
However, dissolution does not prevent former directors from being held accountable for their conduct before the company ceased to exist.
Former directors may remain liable under personal guarantees they have provided in relation to business borrowing, leases or contractual obligations. They may also face investigation by HMRC, Companies House, the Insolvency Service or other regulatory bodies where misconduct, wrongdoing or potential criminal activity is suspected.
Importantly, recent legislative changes have expanded the Insolvency Service's powers to investigate directors of dissolved companies. Directors should therefore be aware that dissolving a company will not necessarily prevent regulatory scrutiny of their conduct.
Can a Dissolved Company Be Restored?
Yes. In certain circumstances, a dissolved company may be restored to the Companies House register.
Applications for restoration may be brought by former directors, shareholders, creditors, insurers or other parties who can demonstrate a legitimate interest in the company.
There are, in broad terms, two routes to restoration. Administrative restoration is an application made directly to the Registrar of Companies, but it is only available to a former director or former member, and only where the company was struck off by the Registrar as a defunct company (not where it was dissolved following liquidation). Restoration by court order is available to a much wider range of applicants – including creditors, former members, parties who would have contracted with the company and persons with a potential legal claim against it – and is the route required in most other cases.
A restoration application may be appropriate where:
- Assets remain in the company's name;
- Legal proceedings need to be pursued or defended;
- A creditor wishes to recover sums owed;
- An administrative error resulted in the company being dissolved; or
- Further investigations of the company's affairs are required.
If restoration is granted, the company is generally treated as though it had continued in existence and had never been dissolved. This can enable assets, claims and legal proceedings to be pursued which would otherwise be unavailable.
Applications should usually be made within six years of dissolution. There is, however, an important exception: where a company is restored for the purpose of bringing a claim for damages for personal injury, the application may be made at any time and is not subject to the six-year limit (although the usual limitation period for the underlying injury claim will still apply). Specialist legal advice should be obtained before making any application.
What Should You Do?
Whether you are considering dissolving a company, responding to a strike-off objection, restoring a dissolved company or dealing with issues arising after dissolution, obtaining early legal advice can often save significant time, expense and risk.
Every company's circumstances are different and the most appropriate route will depend upon its financial position, outstanding liabilities, assets and future business objectives.
How We Can Help
Our specialist Commercial Litigation and Insolvency Team advises directors, shareholders, creditors and businesses on company closures, strike-off applications, liquidations, company restorations and insolvency disputes.
To discuss your circumstances, please contact mfg Solicitors LLP on 01562 820181 or email chianna.weaver@mfgsolicitors.com.