Hello and welcome back to Purnells blogs on insolvency topics.
This week we look at the benefits and drawback of Creditors Voluntary Liquidations ("CVL") versus a Dissolution Application under Section 1003 of The Companies Act 2006 as a way of bringing the life of an insolvent Company to an end.
In the UK a CVL is the process, designed by law, to bring the life of an insolvent Company to an end quickly and efficiently under The Insolvency Act 1986. A dissolution application under section 1003 of the Companies Act 2006 is a process to bring the life of a dormant company to an end. However, in the UK, a Company is defined as being dormant if it has not traded for 3 months. Many insolvent Companies may have already ceased for that amount of time in an attempt to prevent losses and therefore both of these routes are open to these Company.
The biggest comparison points are as follows:
The biggest difference between the two processes is the cost involved.
To pay an Insolvency Practitioner to place a Company into liquidation, the national average fee is approximately £4,000 to £5,000 plus VAT and disbursements. (Purnells' current standard fee stands at £4,000 plus VAT and disbursements). This fee is such because of the amount of work involved in calling of the meeting, the preparation of legal documents for that meeting and the actual holding and running of the meeting itself. (For a run-down of the process of placing a Company into CVL please see our previous blog on the topic).
By comparison a dissolution application costs a £10 filing fee with Companies House. Whilst it is an extremely low price it should be noted that a dissolution process is extremely specific and if it is not done correctly the Directors of the Company could be handed a £5,000 fine. (Purnells do offer to do the application for you, to follow the relevant legislation, and our fee for this is £1,500 plus VAT and the £10 disbursement)
If a Company has already ceased trading for 3 months, as previously mentioned, an immediate application can be made to strike it from the Register. The Registrar of Companies then advertises the application for 2 months and if there are no objections, the Company is struck off. Therefore the quickest a strike off application can be is at least 2 months. However, the reality of this process may be slightly different. If a Company has not yet finished trading, it will have to wait an additional 3 months before it can put forward the dissolution application, increasing the time frame to at least 5 months.
In addition, if a creditor objects to the dissolution during the advertisement phase the application is suspended for 6 months. Another application will be made after this date and advertised again. Without correspondence with the objecting creditor to cease objecting the Company can be stuck in a constant cycle of application and objection. (However, Purnells can assist with limiting the objections by corresponding with Companies House and the objecting creditor.)
HMRC are the usually the main creditor who tend to object to dissolution applications. If a Company has HMRC debt, it is likely that there will be an objection and a 6 month suspension.
In a CVL, once Notices are signed to place a Company into Liquidation, the meetings are held approximately 16 days later and the Company is then in liquidation. The creditors have no say in whether the Company is placed into Liquidation, as this is a decision for the shareholders.
As a CVL is a recognised Insolvency Act process, The Redundancy Payments Office will pay employee unpaid wages, holiday pay, redundancy pay and notice pay up to statutory limits and then claim in the liquidation for the amounts paid out.
As a dissolution application is not an Insolvency Act process, employees will remain unpaid for all the amounts listed above.
In a CVL, once the Company has entered into liquidation all creditor letters, pressure for payment etc gets passed to the Liquidator to deal with. Creditors will no longer be able to chase Directors, shareholders or employees for payment by the Company of their debt.
In a dissolution application, because it is not an Insolvency Act process, creditors will be able to continue to chase Directors for payment by the Company until the Company is dissolved, which as shown above can be a considerable time.
As one can see from the above, CVL is a quicker and more efficient process. However, it comes at a cost. The dissolution process is far cheaper but takes considerably longer and affords none of the protections of a CVL such as unpaid employee claims being met and creditor pressure on directors being relieved.
Here at Purnells we often compare the two processes to moving a mountain of sand with a dumper truck or a shovel and wheelbarrow. The dumper tractor will get the job done in a day but comes at a cost. However, the shovel and wheelbarrow, while cheap will take a month of Sundays to complete.
However, that is not to say that the dissolution process is the wrong process to choose. For some Companies it is the perfect process. That is why there is never a "catch all" solution to how to deal with your Company and we will always provide a free first meeting and letter of advice to clients to allow them to choose what the best route for their circumstances is.
As always, should you wish to discuss CVLs, dissolution applications or any other insolvency matter in more detail, please do not hesitate to get in contact. Telephone: 01326 340 579, Email: firstname.lastname@example.org