Strike off a Company vs Business Liquidation

Company strike off and business liquidation are two ways to close down a business, but it can be difficult to know which process is the most appropriate. Initially, you need to consider your company’s financial position – whether it’s solvent or insolvent – and think about the potential repercussions for yourself as a director.

Your company can be tested for solvency in three ways, and may be solvent if:

• Cash flow test: you can afford to pay your bills as they fall due, and in the case of voluntary strike off, within a period of 12 months from strike off
• Balance sheet test: the value of business assets is greater than its liabilities, including contingent liabilities
• Legal action test: there are no outstanding legal actions against the company, such as statutory demands or County Court Judgments (CCJs)

It’s advisable to seek confirmation of solvency from a licensed insolvency practitioner (IP) before proceeding, so what else should be factored in to your decision?

Eligibility for strike off compared to liquidation

Strike off

Voluntary strike off is only available for solvent companies. If you attempt to strike off the company when it owes money to creditors, it’s highly likely that they will oppose your application to do so.

Liquidation

Voluntary liquidation is available to solvent and insolvent businesses, but the two processes are different. If you enter Members’ Voluntary Liquidation (MVL), which is the option for solvent companies, you must sign a Declaration of Solvency beforehand. Should the company later be found to be insolvent, the process switches to Creditors’ Voluntary Liquidation (CVL).

Ease of process

Strike off

Voluntary strike off involves winding up your company’s affairs, including closing down your payroll scheme, submitting the company’s final accounts, and making all outstanding tax payments. The difference between this and liquidation is there’s no need to seek professional help when striking off a company, and directors take responsibility for ensuring that all requirements are met.

Liquidation

Liquidation is a formal procedure, so a licensed insolvency practitioner (IP) must be appointed to realise company assets, distribute funds to creditors, and notify all relevant parties.

What are the consequences of strike off and liquidation for the company?

Strike off

The company is removed from the Companies House register but if a creditor hasn’t been informed, they can apply for it to be reinstated to make a claim on their debt. When a company is restored to the register in this way, it’s treated as if dissolution hadn’t happened. Directors can face investigation as a result, which is why it’s crucial to ensure that all creditors are notified.

Liquidation

Whilst a company dissolved after liquidation can be reinstated, this is less likely following a liquidation as the IP will contact all known creditors and advertise the appointment in the London Gazette so all parties should be aware of the position.

Cost

Strike off

Company strike off is an inexpensive way to close a company, but it’s necessary to take a broader view than the financial cost alone. The issues that can arise on a personal level for directors, such as disqualification and personal liability, if there are problems following strike off, need careful consideration before proceeding.

Liquidation

As a formal process, liquidation attracts professional fees, and a considerable difference in cost exists between this and voluntary strike off. The benefits of entering voluntary liquidation rather than strike off, however, are also significant and can make the additional cost worthwhile. For example, directors on the payroll could be entitled to directory redundancy when their company goes into insolvent liquidation. Another key difference to company strike off is that once a company has entered into a Creditors’ Voluntary Liquidation, creditors cannot take legal action against the business although they can still attempt to force it into compulsory liquidation although this is rare.

Ramifications of strike off and liquidation for directors

Strike off

If you attempt to strike off your company believing it is solvent, but it owes money to one or more creditors, they’re likely to oppose the strike off and will make a challenge.

A notice is placed in the Gazette prior to a company being struck off, to inform creditors of the situation, and it could lead to an investigation into your conduct. The strike off application may go through unchallenged, but the fact remains that the company can be reinstated and you could be at risk of personal liability and/or disqualification at a later date. In fact, HMRC regularly monitor strike-offs, and will block any action where there are taxes owed.

Liquidation

If the same scenario occurred during solvent liquidation, the process would switch to Creditors’ Voluntary Liquidation. Both processes are administered by a licensed IP, and the fact that you’ve sought professional assistance demonstrates your intent to place creditor interests first.

Begbies Traynor Group are liquidation specialists and can provide further advice tailored to your circumstances. Please contact one of our partner-led team to arrange a free, same-day consultation in complete confidence. We operate a broad network of offices around the UK.