Closing your company: Strike off versus Voluntary Liquidation

April 12, 2022

The impact of the last two years

It goes without saying that many thousands of Companies have struggled since the beginning of the Covid crisis.  Many of those Companies would have utilised the various schemes and assistance put in place by the government, banks and HMRC.

In addition to those that many business owners are familiar with, such as Bounce Back Loans, CBIL’s and HMRC’s VAT deferral schemes, the introduction of The Corporate Insolvency and Governance Act 2020 (“CIGA”) provided temporary measures aimed at assisting UK Companies to weather the storm.  Some of these measures included the restrictions on issuing Winding Up Petitions and the suspension of directors’ liability for wrongful trading.

However, the temporary measures have gradually been faded out. The last of the restrictions was withdrawn when the ban on issuing Winding Up Petitions was lifted on 31 March 2022.

The impact of restrictions being lifted on businesses

This will cause alarm for many Companies and in particular those, which haven’t yet managed to repay any deferred liabilities to HMRC.  Why?  Because HMRC have historically been the entity which issues the most Winding Up Petitions and court statistics already confirm a surge in HMRC petitions in the first week of April.

It is also possible that the banks will now start to issue WUPs against those companies that cannot repay Bounce Back Loans.

So, what options are available if your Company has HMRC debt, a Bounce Back Loan or any other debts it cannot settle because it has taken on too much debt and has no realistic prospect of recovering from the disruption of the pandemic?

Well, there are many, but the question that arises again and again is “What is the difference between a strike off and a Voluntary Liquidation?”

What are the criteria for voluntary strike off?

A voluntary strike off, or dissolution, occurs where a director files form DS01 with Companies House.  The result is that after a short grace period the Company is dissolved as an entity.

The basic criteria for a voluntary strike off are that the Company:

  • hasn’t traded or sold off any stock in the last 3 months
  • hasn’t changed names in the last 3 months
  • isn’t threatened with liquidation
  • has no agreements with creditors, eg a Company Voluntary Arrangement (CVA)

You can dissolve a Company if it has outstanding debts, but you will need to notify creditors of your intention to dissolve and ideally you should obtain written consent from the creditors. Unpaid creditors can, and normally do, object to the dissolution.

Importantly, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 now gives the Insolvency Service the power to investigate dissolved Companies and their directors and commence director disqualification proceedings, tagged to which, there may be personal liability for any debts the Company owed at the date of dissolution.

What is a Creditors Voluntary Liquidation (CVL)

Given the potential pitfalls of dissolving a Company that has debts and cannot repay a bounce back loan, the next and most logical option is to consider is a Creditors Voluntary Liquidation.

A CVL is a director-led process and a formal method of closing down an insolvent Company via Voluntary Liquidation.  All employees are made redundant and can claim for redundancy, pay in lieu of notice, arrears of salary and accrued holiday pay from the Redundancy Payments Office.  Directors can also claim the same, subject to meeting the relevant criteria.

All assets are sold and the cash is then used to fund the cost of the Liquidation and create a pool of funds for distribution amongst creditors.  It is even possible for a director or another connected party, to purchase Company assets.

A CVL is beneficial to directors if a creditor has issued a Winding Up Petition, when the Company cannot pay HMRC debts or if it is unlikely that they underlying business can be rescued.  It also provides relief to stressed directors, as immediately after being instructed our team will be able to provide guidance every step of the way.

There is a common misconception that a director cannot start a new company following a CVL.  This is not the case and, so long as the director is not disqualified from acting as such, a new company can be formed to take over trading.  They can even buy the business and assets back from the Liquidator, subject to certain disclosure and valuation requirements. However, there are restrictions on the re-use of the name of the liquidated company, and certain rules within the regulations set out the steps which need to be undertaken.

Members’ Voluntary Liquidation

If your business remains solvent, but you are looking for an effective option to wind down your operations, a Member’s Voluntary Liquidation could be the answer. To learn more about this process and if it may suit your business situation, read more in our previous article: Members’ Voluntary Liquidation: what directors need to consider.

Do you have questions about the correct way to close your Company?

If you are unsure of the best way to close your Company, it is pertinent to get advice from a Licensed Insolvency Practitioner who will be able to guide and advise you.  Opus Business Rescue has offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

Have questions?

For more information on business options, we offer an initial free consultation to review the situation and make recommendations on the best way forward.

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