There are many ways to bring about an end to a limited company and one of these is a process known as dissolving a company. More commonly referred to as a voluntary dissolution or striking off. It is a relatively simple process whereby the directors submit the relevant form to Companies House and pay a small fee. Notice of your intention to dissolve the company will be advertised in the relevant Gazette and, on the basis that there are no objections, the company will normally be struck off two months later. The directors of a company will often consider this process when there is no longer a use for the company, it is dormant or no longer trading.
It is not only directors who can dissolve a company. A company can also be struck off or dissolved if the company fails to submit the necessary statutory documents to Companies House, if the company has no directors, or if correspondence issued by Companies House gets returned as undeliverable. The Registrar of Companies will normally write two formal letters and, if the matters are not resolved, he will begin the process to have the company removed from the register.
Are there any restrictions on being able to consider dissolution?
You cannot consider a dissolution if a winding up petition has been issued against the company or if a formal insolvency process has been started. This includes processes under the Insolvency Act 1986 such as Administration, Administrative Receivership, a Company Voluntary Arrangement or a Creditors’ Voluntary Liquidation and also Schemes of Arrangement under the Companies Act 2006.
There are several other restrictions that apply, and in terms of practical importance the key ones to consider are that the company has not traded for three months (i.e. this must be a genuine cessation of trade) and that the company has no assets (in the form of property or cash at the bank).
I have seen other articles on the internet that suggest striking off a company as an alternative to liquidation. In this regard, prior to considering a dissolution, there is an obligation upon the company to provide creditors with at least three months’ notice to give them an opportunity to lodge their objection.
Our advice is that dissolution should not be used where a company is insolvent (being that its assets are less in value terms than its liabilities) and a formal insolvency procedure such as a liquidation would be a more appropriate procedure to consider, being guided by an experienced licenced Insolvency Practitioner. In the last 18 months there have been a spate of these “short cut” dissolutions and, in the majority of cases, HM Revenue & Customs, who are often a creditor, are alive to this issue and lodge an objection.
Is dissolution the best way to conclude a company’s affairs
Company dissolution is a handy and cost-effective tool. This is because directors can do it themselves without the need to engage a professional advisor (albeit directors sometimes ask their accountant to help them complete the forms), and subject to meeting all the criteria, it’s low cost and hassle free.
The reason why some unscrupulous directors have attempted to use this process instead of considering a formal insolvency is that there is no investigation into the directors’ activity, no independent analysis of what has happened in the past and very little publicity.
If the company has assets, and in particular assets above £25,000, then dissolution is not an appropriate process and a solvent liquidation should be considered. If the assets are below £25,000 (and on the basis that all known liabilities have been paid in full), since 2012, the members have been able to receive these surplus assets by way of a capital distribution as opposed to being received as income, which can be advantageous from a tax perspective.
What are the disadvantages of dissolution?
• The requirements to access the process are rigorously enforced by the Registrar of Companies and a breach of these obligations can lead to an unlimited fine and, in the worst cases, imprisonment.
• If the company has creditors, these creditors may reject the application to proceed with dissolution.
• A dissolution is not a finite process and, in certain circumstances, a company can be revived for up to 20 years after dissolution. This often occurs if creditors did not receive the correct notice, it comes to light that the company was trading during the three months prior to making an application to dissolve, or if it comes to light that the company or the directors committed some fraud, misfeasance or other unjust action before or during the dissolution process.
• While a common sense approach to collecting assets and distributing them to creditors in proper order usually suffices, there is no prescribed method. The process may be open to abuse and, if performed incorrectly, can lead to a revival of the company. I would always recommend that professional advice is taken from an expert if you are considering undertaking an informal wind down of your company’s affairs.
• Dissolution cannot terminate leases, HP agreements or contingent liabilities.
I am a creditor of a company seeking to be dissolved, what should I do?
From a creditors’ perspective, dissolution avoids a formal investigation into the director’s conduct. Of course, if any transactions such as a preference, transactions defrauding creditors or basic fraud have been committed, dissolution does not afford an investigation into past conduct. If as a creditor you believe that such transactions may have occurred, I would recommend that you withhold permission and oppose the dissolution.
Alternatively, if you have had a good dialogue with the directors of the company and you have been kept fully appraised of the reasons why dissolution is being considered (sometimes a company just simply cannot afford the costs of undertaking a formal liquidation), you may choose to do nothing and allow the process to continue.
If you need any further guidance about a particular set of circumstances, no matter how large or small, please contact us.
Alternatives to Dissolving a Company
Where the affairs of a company are more complex or the assets exceed £25,000, then a Members Voluntary Liquidation (MVL) would be an appropriate process to consider.
If the company is insolvent, before deciding your next steps, take advice from an experienced Licenced Insolvency Practitioner. They will be best placed to discuss the options that are open to you, including advising you on your fiduciary duties as a company director.
For any further information on dissolving a company, please don’t hesitate to contact us.