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To Liquidate or Strike Off an Insolvent Company?

Introduction

Closing down an insolvent company can seem like a minefield, and it is often difficult to navigate your way through all the jargon.  In this article we discuss the differences between dissolution (strike off) and liquidation (winding up), and outline the key features of each option.

Strike off is the process by which a company is removed from the register at Companies House.  It ceases to exist as a legal entity and any assets it still owns at the date of dissolution go to the Crown as “bona vacantia” (property with no legal owner).

A Creditors’ Voluntary Liquidation (CVL) is the procedure whereby a company has its assets realised and distributed to satisfy, insofar as it is able, its liabilities and to repay its shareholders.  An Insolvency Practitioner would administer the winding up procedure and after completion of the Liquidation, the company would be dissolved at Companies House.

What to Consider before Strike Off?

A voluntary strike off is initiated by the Directors by submitting an application to Companies House.  This can be used if the company is no longer trading or it has achieved the purpose it was set up for and is now surplus to requirements.

Before strike off, the Directors should ensure that all creditors are paid, employees are dealt with appropriately, all assets are correctly disposed of, final accounts & tax returns are filed and the company’s bank accounts closed.  The key conditions that a company must meet before an application to strike off is submitted are:

  • It must not have traded in the last 3 months
  • It must not have changed its name in the last 3 months
  • It must not be in a Company Voluntary Arrangement (CVA) or have an outstanding winding up petition

An application to strike off (Form DS01) must be submitted to Companies House and sent to all parties affected (e.g. shareholders, creditors, employees).  Companies House will advertise the application in the London Gazette as a way of notifying affected parties.  As long as no objection to the striking off is received within 3 months, then the company will be dissolved.

A striking off application only costs £10, and for this reason it is sometimes used as a “pseudo liquidation” where there are no funds available to cover the costs of a formal liquidation.  This is because once the company is dissolved, any creditor is unlikely to go to the expense of re-instating it (which must be done through the Courts) in order to continue recovery action.

However, dissolution is not a process for trying to evade creditors and in any event, it is more common these days that HMRC and other finance creditors will monitor the Gazette and object to any striking off application, if they are owed money.  Also whilst uncommon, failure to notify creditors could lead to prosecution or being barred from holding future Directorships. 

When would Liquidation be more appropriate?

Liquidation is recommended where the situation is more complex than for a voluntary strike off and Directors feel there is uncertainty surrounding a company’s solvency.  A company will be technically insolvent if it fails one or more of the following 3 tests:

  • Its liabilities are greater than its realisable assets
  • It cannot pay its liabilities as they fall due
  • A creditor is pursuing legal action against the company for unpaid debts

In this instance it would be advisable to speak with a Licensed Insolvency Practitioner about the range of options available, including voluntary liquidation, and to avoid falling foul of rules concerning wrongful trading.  Directors must be mindful of their fiduciary duty to creditors and take swift action if they believe the company is insolvent.

The liquidator will discuss options to help recover or restructure the business.  If this isn’t possible and it is concluded that the company cannot address its insolvency, then they can assist with taking the company into a Creditors Voluntary Liquidation.  The Liquidator is legally obliged to act in the best interest of creditors and their main concern in liquidation will be to maximise creditor returns.

Whilst voluntary liquidation is the correct course of action where a company is insolvent, it comes with a financial cost – typically around £3,000 + VAT and disbursements, but sometimes more.  If there are no assets to cover this cost then the Directors would be required to cover the costs personally.

As an alternative the Directors could wait for one of the company’s creditors to initiate winding up proceedings in the courts.  However this may never happen and the Directors would need to be careful not to continue trading whilst insolvent, as this could result in a personal liability for any increase in the company’s debts.  The Directors would also need to continue to file statutory accounts and tax returns in the meantime.

In Summary

Although both dissolution and liquidation lead to the eventual closure of a company, the conditions that need to be met in each case are considerably different and it is therefore important to understand the distinction between the two.

In particular strike off should not be used as a way of avoiding creditors – these days it generally doesn’t work, since creditors will object to the strike off, and the directors are at risk of being seen to be in breach of their fiduciary duties, which can have severe consequences.

If you would like more information, or have a client who may need our services, please don’t hesitate to contact me on 0115 871 2921 or by email aftab.zahoor@bridgewood.co.uk.

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