No debt without a debtor

Navigating the complexities of financial security becomes even more challenging when a chargor is dissolved. This article explores the effect of a chargor’s dissolution on the security that it has granted.

Key points

• The dissolution of a chargor extinguishes its legal personality.
• All contractual relationships, including those with the lender, are therefore extinguished.
• This includes the liability to (re)pay a debt and all other primary obligations due to the lender.
• Proceedings cannot be brought against the chargor, unless and until it is restored to the register at Companies House.
• However, claims against a guarantor of a dissolved chargor may remain capable of being pursued by the lender.

Wright v Wright

This recent case in the Scottish Courts concerned a lender who sought to enforce standard security (the Scots law equivalent of a legal charge) granted in its favour by the debtor to secure an unpaid debt. Before enforcement steps were taken by the lender, the debtor was wound up and dissolved. The crucial issue before the Court was the effect of the dissolution on the security.

The Scottish Court concluded that, as the dissolution of a company extinguishes its legal personality, so that it goes out of existence for all purposes, its debts or obligations are also extinguished.

The mere possibility of restoration to the Register of Companies, following which its debts and obligations (including security) would be deemed to have continued in existence, does not change this situation.

Restoration to the Register of Companies must take place before the security could be enforced.

How can a company be restored to the register?

1. Restoration by Court Order

This option is available to a broad group of interested parties, including creditors of the company at the time of its dissolution and any person (but for the dissolution) who would have been in a contractual relationship with the company (i.e. lenders).

The application must be made to the court within six years of the company’s dissolution, although there are exceptions.

Restoration is often dealt with by a consent order, provided that the requirements of the Registrar of Companies have been met and that the Treasury Solicitor has approved the application.

2. Administrative restoration

This procedure is principally intended for those companies who have failed to keep their filings (such as annual returns or accounts) up to date and consequently have been struck off by the Registrar of Companies.

Applications for administrative restoration can only be made by directors and shareholders of the company within six years from dissolution, and it is a key requirement that the company was trading at the time that it was dissolved.

Advice to chargeholders

The dissolution of a customer is an obstacle which may fetter and delay the ability of a lender to take debt recovery or enforcement action.

Our key recommendations are to monitor customers and implement policies which:

• verify whether customers are keeping on top of their filing requirements, such as annual returns and accounts; and
• place the lender on notice at an early stage of any warning signs that a customer may potentially become subject to strike off action.

Lenders should take specific legal advice on the options available where a customer is dissolved. This advice should be taken before the lender seeks to enforce its security or take proceedings against the customer.

Specific legal advice should also be taken in respect of any guarantees that the lender may hold in respect of a dissolved customer’s debts. This is because (assuming a well-drafted guarantee) the guarantor may remain liable to the lender for the guaranteed liabilities of the dissolved customer.