Given the new landscape we are all living and working in due to Covid-19, I wanted to update a blog that we first produced over four years ago, which looked at the benefits and drawbacks of a Creditors Voluntary Liquidation ("CVL") versus a Strike Off Application.
A CVL is a formal insolvency process designed to bring the life of a company to an end quickly and efficiently under The Insolvency Act 1986.
A Strike Off Application, which is also sometimes called the “SpongeBob Method”, is a process that can be used to bring the life of a dormant company to an end using Section 1003 of the Companies Act 2006. A company is usually defined as being dormant if it has not traded for 3 months or more.
The main points of comparison are as follows:
One of the biggest differences between the two processes is the cost involved.
To pay an Insolvency Practitioner to place a company into liquidation, the average fee is approximately £4,000 plus VAT because there is a large amount of work involved. Not only does all of the legal documentation need to be prepared and issued to the relevant parties, but the Insolvency Practitioner also needs to:
1. Call and hold all of the necessary meetings and decision procedures.
2. Undertake a statutory investigation.
3. Make a report to The Insolvency Service on the conduct of the directors.
4. Realise and distribute the assets.
5. Report to all relevant stakeholders.
6. Remove the company from Companies House.
In comparison a Strike Off Application costs only £10, which is the filing fee charged by Companies House. Whilst it is extremely low cost, if you do the work yourself, there is a specific procedure that has to be followed, and if it is not done correctly the directors could be fined. This is something that Purnells could be instructed to do however, which would ensure that the procedure is followed correctly.
If a company has already ceased trading for 3 months an immediate application can be made to strike it from the Register. The Registrar of Companies then advertises the application in the London Gazette and if there are no objections within 2 months, the company is struck from the Register. The earliest a company could be dissolved from the Register is therefore 5 months from the date it first ceases to trade although by the time Companies House has received and processed the application, the likely timescales for dissolution would be more in the order of six months from the date on which the Company first ceased to trade.
Furthermore, should a creditor object to the dissolution, during the advertisement period then the application will be suspended for 6 months. After that 6 month period of suspension has expired, Companies House will re-advertise the notice. Without active correspondence with the objecting creditor therefore, the Company can become stuck in a cycle of application and objection.
It used to be the case that HMRC were the main creditor who objected. Now that the majority of companies have obtained a Government backed Bounce Back Loan however, we are finding that banks are also now routinely objecting to strike off applications. This is because it is currently thought that the Government Guarantee will only be honoured in circumstances where companies have been placed into a formal insolvency procedure.
In a CVL, once Notices are signed, the Company is placed into Liquidation approximately 16 days later. The creditors have no say in whether the Company is placed into Liquidation, as this is a decision for the shareholders. A Creditors Voluntary Liquidation therefore provides directors with more certainty and control than a Strike Off Application.
As a CVL is a recognised insolvency process, The Redundancy Payments Service will pay any valid employee claims for unpaid wages, holiday pay, redundancy pay and notice pay up to statutory limits.
This is also true for directors, as more often than not directors also have employee claims, and the sums realised can be used to settle the costs of the liquidation. If you are a director and wish to see whether you can claim redundancy, follow the link to our website for further information.
As a Strike Off Application is not a formal insolvency process it is not recognised by the Redundancy Payments Service and therefore they will not process and pay any employee claims including those of the directors.
In a CVL, once the Company has entered into liquidation all creditor letters, pressure for payment, bailiff action etc gets passed to the Liquidator to deal with. Creditors will no longer be able to chase directors for the debt due.
With a Strike Off Application however, because it is not an Insolvency Act process, creditors are able to continue to chase directors for payment until the Company has been dissolved, which as indicated above, can take a considerable amount of time to achieve. Furthermore bailiffs and sheriffs can still attend at premises to try to seize company assets. This can become a particular problem if the directors have used their home address as the company’s registered office, as clearly no-one wants bailiffs or sheriffs attending at their home.
A Creditors Voluntary Liquidation is a quicker and more efficient process than a Strike Off Application however, it comes at a cost. Having said that however, if there are assets in the Company, or if the directors are entitled to claim redundancy, then it may be possible for the company to be liquidated at no direct cost to the directors personally.
The dissolution process is far cheaper but takes considerably longer and affords none of the protections and benefits of a CVL, such as the payment of employee claims, creditor pressure on directors being relieved, etc. Also if the Company has a Bounce Back Loan the director may find it is not possible to go down the strike off route and a liquidation may be required, in any event.
That is not to say that the dissolution process is always the wrong process to choose. For some companies it is the perfect choice. That is why there is never a "catch all" solution as to how to deal with your company and we will always provide a free first meeting and letter of advice to clients, which enables them to choose the best route for them having regard to the advantages and disadvantages of each option and their particular circumstances.
Should you wish to discuss Creditors Voluntary Liquidation, Strike Off Applications, or any other insolvency matter, please do not hesitate to contact us on Telephone: 01326 340579, Email: firstname.lastname@example.org