Liquidation Alternatives: Striking Off a Company
If you run a solvent limited company that has ceased to trade then you have two choices about how to close the business down. You could apply to be ‘struck off’ the Companies House Register, or ‘wind up’ the company via a Members’ Voluntary Liquidation (MVL).
In this article, we’re going to explore these two options and look at why striking off your company could be the easiest and most cost-effective way to close your company down.
What is Voluntary Strike Off (aka ‘dissolution’)?
Dissolving a company is the process of getting it struck off the Companies House Register. This process can be used in situations where a solvent company has fulfilled the purpose it was initially set up for, is no longer trading and is unlikely to be needed in the future.
Dissolving the company is the simplest and most cost-effective way to close a solvent company down and is an option for companies that:
- Have not traded or sold any stock in the last three months;
- Have not changed names in the last three months;
- Have no agreements in place with creditors such as ‘Company Voluntary Arrangements’; (CVA) and are not threatened by liquidation.
Striking off a company is not an option for insolvent companies. If the company is struck off before all creditors have been repaid then the directors can be held personally accountable for those debts. They can also be barred from holding future directorships for a period of up to 15 years. Directors also have to inform all members, employees and creditors about the strike off and ensure all funds are distributed lawfully.
Before the company is struck off its share capital, reserves or any other assets should be distributed to its creditors and shareholders accordingly. The maximum value of company assets and share capital that can be distributed on strike off is £25,000. Any funds that exceed this limit will be taxed as income. For that reason, if you are a higher rate taxpayer or the company’s assets are likely to exceed £25,000, a Members’ Voluntary Liquidation could be the better option.
Members’ Voluntary Liquidation Vs. Strike Off
A Members’ Voluntary Liquidation (MVL) is a formal process that can be used to close down a company in a tax efficient way. Examples of when an MVL might be used include:
- A family business where the owner wants to retire and there is no one to carry on the business;
- A business owner who wants to free up assets from an existing company to fund a new venture;
- Where the company was an IR35 company which is no longer required;
- A group of companies is being reorganised and a subsidiary company is not needed.
The MVL process is relatively quick and easy, but it is more expensive than applying to have the company struck off. That’s because a liquidator must be appointed to realise and distribute the assets to the creditors and shareholders on the company’s behalf. That brings administrative costs. However, this option may still make more financial sense due to tax considerations.
Once a liquidator has been formally appointed by the company, they take control of the company and start their administrative duties immediately. The directors no longer have control of the company or its assets and all correspondence and emails are redirected to the liquidator. A Declaration of Solvency must be signed by a majority of directors confirming the company’s ability to repay all its debts within a maximum period of 12 months.
Once the Declaration of Solvency has been signed, a general meeting is called for the shareholders and the resolutions are passed. Once the meeting has been held, the company bank account will be frozen, the liquidation will be advertised in the London Gazette and the relevant forms will be sent to the Registrar of Companies.
Factors to Consider when Making your choice
Strike off – Company dissolution is only possible if no insolvency procedures or threats of legal action exist or are pending against the company. The company must be solvent and the members, creditor and employees must be informed about the strike-off. The funds may not be distributed lawfully if this is not the case.
Members’ Voluntary Liquidation – a Declaration of Solvency must be signed by the company directors confirming the company can pay all its liabilities within a maximum period of one year. The appointment of a liquidator ensures all other statutory procedures are followed.
Strike off – If any irregularities come to light or if a creditor who has not been informed about the company’s closure makes a claim at a later date, your conduct as a director will be investigated. That could lead to a financial penalty, liability for company debt or disqualification as a director.
Members’ Voluntary Liquidation – On signing the Declaration of Solvency, if it later emerges that company liabilities do exist then you could find yourself responsible for those debts. The other penalties mentioned above may also apply.
Strike off – The costs of a voluntary strike off are much less than an MVL, but it is not appropriate in every case. Strike off might be the best option for companies with no or very limited assets, or for sole directors who want to retire. In more complicated cases, the legal risks and tax costs need to be considered more carefully.
Members’ Voluntary Liquidation – This option costs considerably more, but the benefits could outweigh the cost if the company has significant assets. The assistance of a liquidator will provide greater reassurance that all your legal obligations are being met.
Why would a Company be struck off and Dissolved?
Voluntarily striking off is not only the most simple and cost-effective way to close a limited company but it also allows the directors to retain full control of the business throughout the process. Given these benefits, it is often used by company directors who want to close their business for a number of reasons. That includes:
- Retirement – The business owner wants to retire and there is no natural successor to run the business.
- A new challenge – Some directors want to close a business so they can focus on something new.
- To close a subsidiary – During the reorganisation of a group of companies the assets and work of one business can be transferred elsewhere and the remaining shell is dissolved.
- It lacks profitability – Sometimes a business is simply not profitable enough to grow effectively.
- Conflict – It’s not uncommon for company directors to have unresolvable differences about their roles, the company’s future or the products and services they offer.
What Happens when a Company gets struck off?
Once a company has been struck off or dissolved, it is removed from the Companies House register and it cannot trade, sell assets, make payments or be involved in any other business activities. If it does then there could be serious legal repercussions, including financial penalties, personal liability for company debts and a directorship ban for up to 15 years.
Any cash and assets that have not been distributed before the company is dissolved are transferred to the Crown via ‘bona vacantia’. To get those assets back, the company may need to go through the process of restoring the company.
After it has been struck off, the business name becomes available for new companies to use. If you want to restore the company for any reason then you may have to find a different company name.
How long before a Company is struck off?
It takes at least three months for a limited company to be struck off the Companies House register. Once the completed DS01 form has been submitted, then assuming all the details are correct and there are no problems, Companies House will send acknowledgement in the post.
A notice will then be published in the London, Edinburgh or Belfast Gazette (depending on where the company is based) giving three months’ notice of the intent to strike off the company. If no objections are received from interested parties during that time, another notice will be published and the company will be dissolved.
Compulsory Strike off Consequences
Not every company dissolution is voluntary. If directors do not file their accounts and fail to reply to warnings from Companies House, businesses can be struck off the Companies House register and will cease to exist, even if they are still trading. There can be serious consequences for directors of companies dissolved in this way. That includes:
- The company will cease to exist as a legal entity from the date of dissolution;
- The assets of the company will become the property of the Crown;
- Banks will be unwilling to provide finance and future contracts with customers and suppliers will be at risk;
- The directors of companies that have been struck off involuntarily could be disqualified from acting as a director for a period of up to 15 years;
- If the company does continue to trade then the company directors and shareholders will be doing so without the protection of limited liability and could be held personally liable for company debts.
Company strike off Dissolution and Restoration
If you want to restore a dissolved limited company then you will have to apply to Companies House for administrative restoration using form RT01. To be eligible for administrative restoration, the following must be true:
- You were a director and/or shareholder of the company when it was dissolved;
- The business was trading or operating when it was struck off;
- The application must be made within six years of the date it was dissolved.
If these conditions are not met then a company can be restored via a court order. This is a process that can be used by interested parties such as creditors, suppliers and employees as well as shareholders and directors of the company when it was dissolved. For example, a creditor may restore a company using a court order so a debt can be paid.
How to strike off a Dormant Company
A dormant company is one that has registered with Companies House but has never generated an income or carried on any trading activity of any kind. Companies can be dormant from the date of their incorporation or they can become dormant after a period of activity.
A company can remain dormant for any length of time but it does have to fulfil a number of statutory obligations to avoid being involuntarily struck off. That includes:
- Informing the local corporation tax office that the company is dormant as soon as possible;
- Filing annual returns and dormant accounts;
- Keeping up-to-date records;
- Reporting changes to the registered company’s details.
A company director can choose to voluntarily strike off a dormant company at any time as long as it has not traded, changed names and is solvent. To do so, form DS01 must be completed, signed and dated by all the company directors or the majority of the directors if there are three or more. If the company traded previously, you also need to inform HMRC and settle any tax and creditor liabilities.
Companies House will review your striking off application and send confirmation by post if everything is as it should be. A notice will then be published in the Gazette giving three months notice of your intention to strike off. If no objections are received, the company will be struck off, a further notice will be published in the Gazette and the dormant company will cease to exist.
Can I strike off a Company which Never Traded?
Yes. A company that never traded is an example of a dormant company. Dormant companies can be dissolved using the process described above.
Striking off a Company Bona Vacantia
If a company is struck off before its share capital or company assets have been distributed then it becomes the property of the Crown by virtue of ‘bona vacantia’. Bona vacantia literally means ‘vacant goods’ and is the technical term to describe the process by which undistributed assets pass to the Crown.
That’s why it’s so important for company members to make sure any assets are dealt with and transferred out of the company’s ownership before it is dissolved. One of the biggest risks of a compulsory strike-off is that the company is dissolved before the members have had the opportunity to distribute the assets and share capital.
If you are a former member, shareholder or creditor of a company and you want to get an asset back from the Crown you will have to try and restore the company. Restoring the company removes bona vacantia so it has ownership of the asset once again. However, if the Crown has disposed of the asset then you will be paid whatever the Crown received from the sale, minus the costs incurred while realising the asset.
Alternatively, if you were a shareholder of the former company, you may be able to apply for a discretionary grant. That allows sums of money to be recovered without having to make an application for the company to be restored.
How can we help?
At Company Debt, we offer independent, confidential and no-obligation advice for company directors who are looking to close their business. We can help you identify the best route from a tax perspective and ensure you receive the protection you need. For more information, please contact our team today.