Striking off a business can be a relatively straightforward and cost-effective way to close down a company with no assets.
By striking off the company, directors can retain full control of the business throughout the process, pay off creditors, and eliminate the need for a formal creditors’ meeting.
However, not all companies can be struck off or ‘dissolved’ in this way. In order to strike off a company, it needs to be solvent. Therefore, if a company has debts, a different route must be taken to close it down.
Let’s take a look at the striking off process in a little more detail and assess the options for companies with debts.
What does striking off mean for a company?
A company strike off, also known as dissolution, is a process that involves removing the details of a limited company from the Companies House register. Once the company name is removed, it no longer exists and cannot trade. It is a voluntary procedure available to solvent companies, and can be initiated by directors upon submitting a DS01 form to Companies House. Submitting a DS01 form will cost directors £10 in paper format or £8 if done through the online portal. The process can then begin in earnest, with the end result being a wound-up company struck off from the Companies House register.
Can all companies be dissolved?
In short, no. Companies need to be solvent in order to be dissolved. Any remaining debts must be paid in full before the company in question can be struck off. If a company is insolvent, meaning it cannot repay its debts, it will not meet this criterion. As such, it will be ineligible for a company strike off, and other means should be pursued.
With that said, an application to strike off an insolvent company won’t be dismissed out of hand. Directors of insolvent companies can submit a DS01 form, and begin the process to strike off their company. However, while the process may well begin without a hitch, it likely won’t be that way for long. Once a company has started down the path of dissolution, directors must publish their intentions in the local Gazette. If a company’s creditors notice this, as will likely happen, they can lodge an objection, quickly putting a stop to any attempts at dissolution. This could be the end of it, or the attempts at dissolving an insolvent company could be perceived as an attempt to escape debt. This may lead to legal implications to directors, and the compulsory liquidation of their company.
There is another set of circumstances that could make a company ineligible for strike off. If the company is undergoing an insolvency procedure, it’s been threatened with liquidation, or it has a creditor agreement such as a Company Voluntary Arrangement (CVA) or a Creditors’ Voluntary Liquidation (CVL), it cannot be struck off or dissolved.
Potential penalties for striking off an insolvent company
If a director attempts to strike off an insolvent company, they may make themselves vulnerable to legal penalties. These penalties will be decided by the Insolvency Service, and will heavily depend on the situation at hand and actions taken by directors. These penalties can include the following:
- The disqualification of a director’s license for a period of 2-15 years. This includes a ban from holding any management positions, both in companies owned by the director and otherwise.
- Fines as determined by the Insolvency Service based on the severity of the case.
- An order to repay the company in question an appropriate sum. This is typically the case when the company unlawfully pays out dividends.
- Personal liability for company debt can be enforced upon a director.
- In the worst cases, a director can be sentenced to prison.
Given the severity of these penalties, avoiding the risks of sneaking an insolvent company into dissolution is best. Even if an insolvent company is successfully struck off, its creditors can still petition to reinstate the company to recover what they are owed. At that point, the above consequences can still be applied to directors.
How does a company strike off work?
While not as tax efficient as a Members’ Voluntary Liquidation (MVL), a company strike off is an incredibly cost-effective and straightforward method of closing a company. As we mentioned, it can be initiated voluntarily with the submission of a DS01 form, costing directors only £10 or £8, depending on if the form is in paper format or through an online portal, respectively. Once the DS01 form has been submitted, directors must publish a notice detailing their intentions to dissolve their company in the local Gazette. As we covered earlier, this will open the company up to disruption from outstanding creditors, so all outstanding debts and liabilities must be repaid beforehand.
Once all debts have been repaid, directors must take all assets out of the company. Directors will have until the company is completely struck off to do this, which will amount to about three months once the Gazette notice is published. Assets can be sold, transferred, or otherwise taken out of the company during this time. Anything that remains legally in the possession of the company after it is closed will be considered “bona vacantia”, or without an owner. This will result in such assets and accounts being transferred to the Crown, as assets cannot be owned by an entity that no longer exists. As such, you should make sure to have a good plan in place before you get started, unless you want to risk making an impromptu donation to the Crown.
Why do directors choose to dissolve their companies?
There are a number of reasons why a director may choose to close their company down by dissolving it.
The most common reasons can include:
Wanting to retire
If the business owner wishes to retire and there’s no one suitable to be a successor, dissolving the company may be the best option. If the company is solvent and hasn’t traded, sold any property rights or changed names in the last three months, striking off is likely to be a valid option.
Reorganising a group of companies
If it makes sense to reorganise a group of companies or merge them into one, there may be a company that is no longer needed. If this is the case, it may make sense to close that company down by dissolving it.
The company is no longer profitable
If a company is not making enough money for it to be worthwhile for its owners, going through the dissolution process may be the preferred option. As we mentioned, it is an incredibly cost-effective method of closing a company. If the company doesn’t have much retained profits, it may make a lot more financial sense to pay a small fee for dissolution, rather than a larger fee for an MVL.
Although these tend to be the most common options, there are numerous other reasons why striking off a company may be the best option. For example, there may be conflict between the directors, there are challenges that are proving extremely difficult to overcome, or there’s no longer a market for the company’s products or services.
What are the options for companies that cannot be dissolved due to debts?
There are other options available for companies unable to dissolve due to underlying debts. One of the most popular solutions is the Creditors’ Voluntary Liquidation (CVL) process.
A CVL offers directors an incredibly effective method of closing an insolvent company. It offers two series of benefits; the first is an efficient liquidation process, and the second includes strong legal benefits. If you choose to close using a CVL, you can appoint an insolvency practitioner of your choosing to the role of liquidator. In this role, they will take charge of your company, ensuring it is wound up properly. The liquidator will identify and dispose of company assets for the best possible price, distributing the proceeds amongst outstanding creditors. Once all distributions are made, the company will be wound up and removed from the Companies House register.
In addition to an efficient method of closing a company, both you and your company will enjoy certain legal protections. Once the process is underway, your company will be protected from legal action, effectively preventing creditors from filing a winding-up petition and forcing a compulsory liquidation. Moreover, any debts that remain outstanding after the company has been closed will be written off, excluding those secured by a personal guarantee.
As the CVL process is voluntary, directors may also benefit from a somewhat hidden advantage. Namely, by entering your company into a CVL, you demonstrate a willingness to act on behalf of your company’s creditors. This offers great protection against accusations of misconduct, and will play in your favour should any disagreements reach the courts.
Clarke Bell can help
At Clarke Bell, we often hear from company directors who are having difficulties closing their companies due to financial problems. In some cases, the outstanding debts aren’t a large amount, but problems remain.
If this sounds familiar, we can help. We’ll charge a basic fee and will offer you a solution that:
- Deals with the business debts of the company
- Ensures that all the directors’ legal obligations are met
- Gives directors peace of mind and guarantees that new problems won’t arise further down the line
To learn more, please get in touch with the team at Clarke Bell.