Striking off a company or putting it into liquidation (the latter known as a Members’ Voluntary Liquidation or MVL) are two different ways of winding up a solvent company. When a company is insolvent, the Creditors’ Voluntary Liquidation (CVL) or a compulsory (court ordered) liquidation are the routes available for closure. Windups of insolvent companies are mentioned here for completeness but are beyond the scope of this note.
There are various reasons why a solvent company might be closed – sometimes a business has simply reached the end of its usefulness for the owners, whilst in other instances the directors may wish to retire. In these cases, the routes to dissolution can generally be split into two broad categories:
- those capable of being closed by simple strike off, and
- those requiring more formal closure by liquidation process based on risk or capital structure criteria for tax reasons.
As a preliminary evaluation exercise, companies being considered for closure can generally be split into strike off and liquidation groups by reference to their last accounts supplemented, where necessary, with up to date financial information derived from management accounts. The final decision on the appropriate closure method must be made with reference to current financial information and taken by the directors based upon their knowledge of the business and their assessment of risk. Taxation implications of all closure options and related preparatory work must be considered carefully at closure company/parent and group levels.
Dissolution by Strike-off
Section 1003 of the Companies Act 2006 gives a company’s directors the authority to apply to strike off their company.
Strike off is not appropriate in all cases. The decision to strike a company off the register should only be made after a careful consideration of its financial position, trading past and the taxation advice received. It is important to note that a company must not have traded or changed its name in the three months prior to lodging a strike off application.
It is important, if a company is to be struck off, to ensure that it does not own significant property (intangible or otherwise). If a company is struck off while it still has assets, those assets will become the property of the Crown and obtaining a release of them is an expensive and time-consuming process.
Strike off candidates are likely to have or be capable of being lawfully transformed into a position where they have the following characteristics:
– no liabilities or obligations (particularly to unconnected/third parties); and
– no or very low levels of undistributable reserves.
Where a private company has assets represented only by share capital, it can undertake a capital reduction by shareholder special resolution supported by a directors’ solvency statement without having to seek the sanction of the courts. This procedure is a very useful tool to release distributable reserves of highly capitalised solvent (liability free) companies.
Section 1003(6)(a) of the Companies Act 2006 states that after dissolution: “The liability of every director, managing officer and member of the company continues and may be enforced as if the company had not been dissolved”. For that reason, there should be no liabilities owing or obligations to unconnected creditors or parties whose interests may be prejudiced if the company is closed down. It is very important to ensure that a company is in no way committed in respect of any liabilities to third parties as those parties may be opposed to the closure and make an application to stop the company from being struck off. It is possible to strike off companies with outstanding liabilities and even those that are insolvent however all creditors must have been advised of the closure decision and must be agreeable to the strike off progressing. It is not uncommon to see inter-company creditor balances remaining at the point of dissolution when the creditor is a “friendly” group company however taxation advice should be taken in all instances to ascertain whether it is best to leave debts in place or undertake a capitalisation exercise to clear them and reach a nil asset nil liability position in advance of closure.
- a) Preparation for Strike off
When preparing a company for closure the directors must make arrangements to lawfully clear the balance sheets to the desired pre-closure position, this may involve the offset and assignment of debtor and creditor balances to leave a single debtor or creditor balance due/payable. Inter-company balances should ideally be organised so that they sit directly between parent and subsidiary companies so that distribution or capitalisation/release can most efficiently be undertaken to eradicate them prior to closure.
Checks must be undertaken to ensure that there are no residual contractual/contingent liabilities that may revert to become obligations of the company at a future date. Most obvious issues relate to assigned property leases which may have a reversion clause if the assignee defaults during the residue of the lease term. In such cases it is usual to secure the agreement of the landlord by way of a formal release.
Checks should also be undertaken to ensure that there are no outstanding pension liabilities or obligations before initiating company closure proposals and that there are no regulatory approvals or clearances required in advance of closure.
It is important to undertake a thorough pre-implementation analysis of the tax effects of any preparatory clearing work undertaken to ready a company for closure and the tax effects of the closure itself. HMRC are notified of strike off applications and may object if they have not previously been informed of the decision and provided with evidence to satisfy themselves that there are no outstanding tax matters or amounts payable. HMRC objections are the most common cause of complaint raised under the strike off procedure, these objections do not automatically terminate the procedure but could delay it by several months whilst the relevant dialogue is undertaken to clear the way for strike off to resume.
- b) Strike-off Procedure
To initiate strike off, the directors need to pass a board resolution and file the appropriate form together with the filing fee, at Companies House. Once the application has been made the Registrar will publish a notice in the London Gazette stating that the Company will be struck off in not less than 2 months’ time subject to no objections being raised (as mentioned above).
It is useful to note that the Registrar of Companies will not seek delivery of financial statements once the strike off form has been lodged at Companies House and the closure process has been initiated. Note however, for tax purposes, there may be a need to have non-statutory management accounts based accounting information available for submission to HMRC.
Lastly, it is important to stress that notification of the strike off closure decision must be given to interested parties (including all creditors) within 7 days of the application form being filed.
You should keep business documents for 7 years after the company is struck off, for example bank statements, invoices and receipts.
Members’ voluntary liquidation (“MVL”)
This method should be considered if a company is solvent with substantial non-distributable reserves and/or in riskier cases involving active companies with complex or incomplete corporate/trading history.
As mentioned above, MVL (a formal liquidator led closure procedure) is in itself a mechanism under which locked in assets can be distributed. Distributions are taxed as capital rather than income, and members may also be able to claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which brings the effective rate of tax down to 10%. As such, MVLs can be a tax-efficient way to extract funds from a business.
The MVL process
The basic timeline of a Members’ Voluntary Liquidation is as follows:
- Appointment of a licensed insolvency practitioner
- Declaration of Solvency sent to Companies House
- Winding up resolution made
- Advertisement in the Gazette and creditors informed
- Sale of assets and distribution of funds
- Removal from the Companies House register
It is usual in MVL cases for the directors to undertake pre-closure tidying work to simplify the balance sheet and present the company in a tidy state to the liquidator. This reduces the administration work undertaken by the liquidator and ensures costs are contained. In ideal cases all liabilities are settled before the solvent liquidation is initiated and at the point of liquidation the assets are reduced as far as lawfully permitted and reorganised to leave a single cash or inter-company receivable balance (due from the immediate parent) which the liquidator can distribute during the liquidation.
It may be appropriate in some cases to undertake a solvency statement based capital reduction (as referred to above) to unlock un-distributable reserves and thereafter distribute them in advance of a formal MVL. This may enable the speedier upward distribution of the bulk of a company’s assets than would be permitted by the liquidator and would potentially reduce the liquidation expenses to the extent that the bond or indemnity costs are determined by the scale of the assets being distributed.
The liquidation is likely to take at least six months to run its course. The liquidation process involves the directors making a statutory declaration of solvency, the appointment of a liquidator (a licensed insolvency practitioner) pursuant to a shareholder special resolution and a creditor advertising process. The liquidator will generally require an indemnity from the parent company to recover the costs of any creditor claims or other liabilities that may subsequently emerge following liquidation.
Restoration of a company
If a company has been dissolved and a creditor was not informed of the strike off decision then that creditor may apply to the court to have the company restored as a means of pursuing their claim against the company and, potentially, its directors.
Under both the strike off and liquidation closure methods there is unlikely to be any ongoing accounts filing obligation imposed by Companies House once strike off/liquidation papers have been filed. In particular, it is worth noting that under provisions of the Companies Act 2006 the restoration period has been aligned at a uniform six years for closure by either liquidation or by voluntary strike off methods. However, there is no time limit for the restoration of companies (however closed) in cases where action is being bought for industrial injury or sickness compensation claims.
In the event that there are any uncertainties associated with a company’s past or any contingent liabilities or unquantifiable risks it is often appropriate to select a formal liquidation over the informal strike off process.
If liquidation is the preferred closure method, it may be considered appropriate to first restore insolvent companies to a solvent (break-even) position to ensure that members’ voluntary liquidations can be undertaken as opposed to insolvent liquidations. In an insolvent liquidation the liquidator is required to prepare a report to BIS into the conduct of the directors involved in the management of the insolvent company and an assessment may be made as to whether they are fit to hold office as directors. No such report is required under the solvent liquidation procedure. The tax implications associated with capitalising inter-company balances or making capital contributions or waiving debts to restore insolvent companies to a solvent position should be considered carefully
Whilst the liquidation cost of an MVL is generally higher than a dissolution or strike off, the former is still a better option if:-
- the company has any sort of trading history or is still trading;
- there are claims from creditors that still need to be settled;
- there are liabilities in the company;
- assets may be greater than liabilities and the distribution may be complicated.
If the company is dormant or has ceased trading some time ago and there are little remaining assets and no liabilities in the company then striking off may be more advantageous for its low cost.
However, there is a risk of restoration later if the company is not wound up using the benefit of a liquidator, so the company should be very sure that dissolution by strike-off is the correct procedure for them before embarking on it.
If you would like more information on the above, please get in touch with our corporate team for a free 30 minute consultation.
Head of Corporate
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