CVL Vs Strike Off – Which Is Better For An Insolvent Company?

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In this article, we look at the options available to directors to close their insolvent company, i.e. one that cannot pay its debt as they fall due. When a company is insolvent, and there is no real prospect of recovering, the directors have a duty to act in the best interests of creditors. It is for this reason, that the most appropriate process for the directors to initiate is a creditors voluntary liquidation (CVL).

Despite this, many directors still either opt to do nothing and allow creditors to petition for a compulsory winding up, or simply apply for the company to be struck off.

What Is A Strike-Off & What Are The Pre-Conditions?

The term ‘strike off’ refers to a company being struck from the register of companies. A company can either be compulsorily struck off, usually as a result of a failure to file accounts or confirmation statements, or voluntarily struck off. In the event of the former, the directors, secretary or advisor of the company may apply to the Registrar of Companies for their company to be struck off if it is no longer trading.

Please read our previous article, entitled ‘MVL Vs Strike Off – Which Is Better For Solvent Companies?’ which explains what a company strike off is, and what the pertinent pre-conditions are. Whilst that article specifically applies to solvent companies, the pre-conditions equally apply to insolvent companies.

Striking Off An Insolvent Company – The Practical Considerations

Once a company is dissolved (struck off) it effectively ceases to exist. The directors no longer have any active duties and there are no further statutory filing requirements.

It is important to ensure that all bank accounts are closed and all assets disposed of prior to the date of dissolution. Any cash or assets belonging to the company upon dissolution become bona vacantia (ownerless property) and vest in the Crown.

The strike-off process was designed for dormant companies, or those which no longer trade, which have no liabilities. If a creditor has been overlooked, they can apply for the company to be restored to the register which could result in personal implications for the directors, which we have explored further below.

As such, those opting to strike off their company should ensure that the process is planned carefully and advice obtained from experts, if necessary.

Why Would Director’s Choose A Strike-Off Over A CVL?

There are two main reasons that a director would opt to strike off an insolvent company as opposed to entering a creditor’s voluntary liquidation. The first reason, and perhaps the most common, is that the company or its directors may simply have insufficient funds available to pay for a CVL.

The cost of placing a company into creditors voluntary liquidation typically ranges from £3k-£5k plus disbursements and VAT. You can obtain a bespoke quote for your company within 60 seconds by using our online CVL quoting tool. If the company has assets or the directors are entitled to redundancy or other statutory entitlements due to the insolvency, the CVL could be at no cost to the directors at all.

The second reason for choosing a strike-off over a CVL is, in some instances, a deliberate attempt to avoid paying creditors and/or the investigations that would otherwise be completed by a Liquidator as regards the financial affairs of the company and the conduct of its directors. This is a common misconception and a risky strategy to adopt.

Can Creditors Block A Striking Off?

The actual process of striking off a company is implemented online using the Government’s website. The guidance issued on the website makes it clear that all relevant parties must be made aware of the intention to strike off the company, this includes any company creditors, HMRC, bankers and employees.

If the reason for the strike-off is genuine, i.e. the company is insolvent and there are no funds to place the company into CVL, many parties will be accepting of this and allow the strike-off process to proceed. If any of the parties are not accepting of the position, they can object to the striking off, which will either force the directors to place the company into a CVL, or they can ask creditors to petition for the company to be wound up. It places the company in a state of limbo, where an insolvency process becomes an inevitability.

What Happens After The Strike Off?

When a company is successfully struck off, it is referred to as dissolution. The company effectively ceases to exist and is removed from the company register.

In recent years there has been an upward trend in directors who have successfully applied for their company to be struck off, only for disgruntled creditors or HMRC to apply for the company to be restored to the register. This can be done for 20 years following the dissolution!

If a creditor successfully applies for a company to be restored following dissolution and it is suggested that the reason for the strike-off was to avoid paying creditors, the conduct of the directors will be investigated by the Insolvency Service. If there is evidence of misconduct, the directors can be disqualified from acting as a director for up to 15 years.

The investigation by the Insolvency Service will also include a review of the antecedent transaction provisions set out within insolvency legislation, that would otherwise be reviewed by the Liquidator in the CVL process. This would include any claim against the directors for misfeasance, wrongful trading, fraudulent trading, preference payments and transactions at an undervalue. If found guilty, directors could find themselves being held personally liable for the company’s debts, potential unlimited financial penalties or a custodial sentence of up to 7 years. This is, of course, the worst-case scenario but it clearly demonstrates that avoiding an insolvency process does not necessarily mean directors will be let off with any case of wrongdoing.

Placing Your Company Into CVL With My Liquidation

As mentioned previously, the costs of placing a company into CVL are materially higher than applying for a strike off. With directors also not fully understanding how to place a company into voluntary liquidation, the process itself can be daunting. Notwithstanding this, it cannot be overlooked that if you are a director of an insolvent company you have a duty to creditors to wind up the affairs of the company properly, which includes a licensed insolvency practitioner becoming involved.

At My Liquidation, we recognise our duty to provide directors with high-quality advice when considering their options. If we believe there may be some issues to be reviewed as part of an investigation (which apply in both a strike-off or a CVL as outlined above) we prefer to disclose these from the outset of our instruction so that directors can make an informed decision. If you choose to place your company into CVL with us we will make the process as simple and fast as possible.

With My Liquidation, you are in safe hands. If you would like to consider your options further, please contact us for some free, no-obligation advice.

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