Liquidation and striking off are often used to mean the same thing – closing a company down – but in reality are actually quite different.
Sometimes people mistakenly refer to the phrase “company bankruptcy” when a company closes but this is incorrect. Bankruptcy is only relevant when addressing an individual, partner, or sole trader not the limited company itself.
Both of these terms refer to closing a company; either because the business has cash-flow problems, or because there is no further use for the company of which there may or may not be cash and assets held by the business, such as property, that the directors and shareholders would like to extract.
Company dissolution (which is what striking off is formally known as) is an informal and cheap way of closing down a business but it can only go ahead if the company is solvent and there are no outstanding insolvency procedures or threats of legal action against the business.
A creditors voluntary liquidation (CVL) on the other hand, is a formal, legal insolvency process to close down a business that is insolvent. A similar process called a members voluntary liquidation (MVL) is exclusively used to close a solvent business.
A dissolution or striking off puts the responsibility of shutting a business down in the hands of the directors. It’s important to note that this makes them personally liable if it comes to light at a later date that a creditor wasn’t informed of the closing down of the business or if there are discrepancies including if the business has debts and is therefore ineligible to close down this way.
This could ultimately result in a directors disqualification, a financial penalty or even being made personally liable for the company’s outstanding debts.
A CVL on the other hand can only be carried out by a licensed insolvency practitioner. Once someone is appointed they will have a responsibility to investigate the actions of company directors and that they’re putting the interest of the creditors first. If fraudulent activities are uncovered then directors can be open to charges of wrongful or fraudulent trading with further consequences.
CVL’s cost more than a dissolution but if you have creditors you have the comfort, guidance and expertise of the insolvency practitioner who will ensure all the correct legal steps are taken. A strike off may be more desirable if the company has no or few assets, however if you have a complicated case,you must consider the tax costs and legal risks.
A CVL is a streamlined, tried and trusted procedure which provides solutions to many outstanding insolvency problems and issues. A key benefit being that any remaining unsecured business debts and liabilities that aren’t personally guaranteed will be written off.
Voluntary liquidations in a post-Covid world
In January, the Insolvency Service reported a total of 1,560 company insolvencies in England and Wales, of which 1,358 were creditors’ voluntary liquidations (CVLs) and just 118 compulsory liquidations started in court by creditors. This latest CVL figure is 122% up from January 2021 and 34% up on the pre-pandemic equivalent in January 2020 which shows many directors are choosing it as the preferred method to close their company down efficiently.
The CVL process starts with shareholders passing a special resolution that the company be wound up after directors determine that the company is no longer financially viable and won’t be able to pay all its creditors – a judgement they have to consider as soon as they realise the business is in financial difficulty to avoid breaching their statutory duties.
Directors mindful of that risk and looking to cover themselves will often seek external advice on the crucial question of whether or not there is a reasonable prospect of avoiding insolvency. The company’s accountants are typically the first port of call and any advice they give should make it clear that a CVL is not an ‘easy’ option that will avoid a review of the directors’ conduct and decision making.
Although shareholders (often also directors) typically nominate a liquidator, their choice doesn’t mean that the liquidator will approach the liquidation in any less rigorous way than they would normally do. Liquidators have statutory obligations to investigate a company’s affairs, along with its directors’ conduct, and make a confidential report to the Secretary of State (for Business, Energy and Industrial Strategy) on their findings. If they identify director “unfitness”, the report usually triggers an investigation by the Insolvency Service, which could ultimately lead to disqualification proceedings.
All of a liquidator’s options to explore claims against directors for fraudulent trading, wrongful trading, misfeasance (for breaches of directors’ duties) remain open in a CVL, as do claims to recover balances on any overdrawn directors’ loan accounts as well as actions to challenge transfers at low values and preference claims.
Although the vast majority of directors during Covid did nothing except their very best to keep their businesses running in the hardest possible circumstances.
Directors considering their options should also be aware of the impact of recent changes to the director disqualification regime introduced on 15 February 2022 by the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 which extend the Insolvency Service’s powers to investigate the conduct of directors of dissolved companies.
It used to be the case that to bring such proceedings, the company had to be restored to the Register of Companies. That typically took a number of months and added additional costs. Now, the Insolvency Service can issue proceedings against directors of dissolved companies personally without having to take those steps, and, perhaps most importantly, can bring disqualification claims up to three years after the company’s dissolution.
The changes have been introduced to discourage directors from using the dissolution process as a way to avoid potential scrutiny (and liability). They should deter directors juggling with post-Covid debt laden balance sheets into thinking that circumventing a shareholders’ CVL resolution will allow them to avoid a liquidator and all of their powers. Whilst directors must take account of their responsibilities to creditors and act in their interests when insolvency looms, they should also remember their duties to the company and its shareholders who, like liquidators, can ask the court to examine directors on their conduct and potentially order them to make repayments to the company or contribute to its assets in view of any breaches of duty.
Chris Horner, insolvency director with BusinessRescueExpert, said: “One of the most confusing aspects for a director when they’re thinking about closing their company down is all the jargon and terminology.
“A lot of it means slightly different terms so has to be precise but it can be confusing and often intimidating to people when they need clear advice about what they can do in their situation.
“As well as advice, our website has lots of guides and information about the various different insolvency tools and processes so directors can educate themselves in advance to find out what might be the most appropriate route for them to take.
“But the best option is always to have a chat with us.”
To better understand the options available to business owners and directors they can get in touch with us to arrange a free consultation with one of our expert advisors.
They’ll provide unbiased and clear advice based on the unique circumstances facing each business and suggest what solutions would be the most appropriate and easiest to implement leaving them with a clear idea of how they should close their business if that’s their final decision.