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So, how do you dissolve an insolvent company with no assets?
If a company is insolvent and there is no prospect of rescuing the company or its business as a going concern, then it will need to be closed down and dissolved. In this scenario, a company would usually be placed into liquidation for it to be eventually dissolved. However, in some cases there are no assets to meet a Liquidator’s fees and disbursements.
If there are no assets to meet a Liquidator’s fees and disbursements and the directors or a third party have no financial means to contribute toward these costs, then the directors’ options are limited.
Presumably by this point the company has ceased to trade. By doing nothing, the company is effectively waiting for another party to initiate a process that will ultimately result in the company’s dissolution. This could be by Companies House applying for the compulsory striking-off of the company or a creditor issuing a winding-up petition which would lead to a winding-up order and the company being placed into compulsory liquidation.
What is compulsory strike-off?
Compulsory strike-off is an action available to Companies House. If a company is neither carrying on business nor operation, the Registrar may take action to strike a company off the register. This action is referred to as ‘compulsory strike-off’.
Before striking a company off the register, the Registrar is required to issue two letters and send notice to the company’s registered office to inquire whether it is still carrying on business or in operation. If the Registrar is satisfied that it is not, they will publish a notice in the London Gazette stating their intention to strike the company off the register unless they are shown reason not to do so.
A copy of the notice will be placed on the company’s public record. If the Registrar sees no reason to do otherwise, they will strike-off the company not less than two months after the date of the notice. The company will be dissolved on publication of a further notice stating this in the London Gazette.
My company’s status is ‘active proposal to strike-off’, what does this mean?
Once Companies House has processed an application for striking-off, the company’s records are updated, and its status changed to ‘active proposal to strike-off’.
What is a first Gazette notice for compulsory strike-off?
This notice is the first advertisement placed in the London Gazette effectively notifying the world of Companies House’s proposal to strike-off the company.
The notice usually states the following:
The Registrar of Companies gives notice that, unless cause is shown to the contrary, at the expiration of two months from the date of this notice, [company name] will be struck off the register and the company will be dissolved.
Can a compulsory strike-off application be objected to?
Yes. A creditor or interested party can object to the proposed compulsory strike-off application. Companies House will decide whether to accept or reject the objection. If the objection is accepted, the compulsory strike-off application is suspended.
What happens when a strike-off application is suspended?
If a striking-off application is suspended, then this route to dissolution is not available to the company. The directors will therefore need to decide on an alternative route.
How long does a compulsory strike-off application take?
If a company has recently filed a confirmation statement and its financial statements, then it could be a long time before Companies House commence this process as late filing of these documents is one of the triggers. Directors wanting to take immediate action to dissolve the company may therefore prefer an alternative route to dissolution.
What is a winding-up petition?
A winding-up petition is a legal action taken by a creditor or creditors against a company that owes them money (although other parties can also petition).
If the company owes £750 or more, the creditor can issue a petition in Court. The petition will have a hearing date endorsed on it and then must be served at the registered office of the company. It will then be advertised in The Gazette, after a fixed period.
The Court will then decide whether a winding-up order should be made. If the order is made, the company is placed into compulsory liquidation.
This is an expensive option for creditors, and is considered to be a last resort, so it is only used when all other options to collect a debt have failed. The Courts do not look on it as a debt recovery process, rather that the company is insolvent and should be wound up.
What is compulsory liquidation?
Compulsory liquidation is a formal insolvency process which commences with the making of a winding-up order.
Following the making of the winding-up order, the company is immediately placed into liquidation. The Official Receiver, a civil servant of the Insolvency Service, acts as Liquidator. The Liquidator’s duties include realising the company’s assets, carrying out an investigation into the company’s affairs and directors’ conduct, discharge the costs of the liquidation and distribute surplus funds to creditors in accordance with their legal entitlements.
Is compulsory liquidation likely?
Due to the legal costs and disbursements involved in issuing a winding-up petition, creditors tend not to commence this process for commercial reasons. A creditor petition is more likely to be issued where a creditor has concerns that warrant investigation by a Liquidator.
If a company is in arrears with HM Revenue & Customs, then it is likely that a winding-up petition will be issued. However, this process can take months and then the company will need to wait for the Court hearing. Again, directors wanting to take immediate action to dissolve the company may wish to consider alternative options.
So, what other routes to dissolution are available to directors?
The Spongebob plan
If you are reading this blog, you may well already be aware of the Spongebob plan. Essentially, this is a company’s voluntary application for it to be struck-off and dissolved. The plan was named after a member of UK Business Forums (www.ukbusinessforums.co.uk) who posted an article setting out the process. The article can be found here.
The plan is targeted at small insolvent companies with no means of paying a Liquidator’s fees and disbursements.
Can an insolvent company apply for it to be struck-off and dissolved?
In short, yes. But the company must be eligible and meet all the requirements of the Companies Act 2006.
Sections 1004 and 1005 of the Companies Act 2006 set out the circumstances in which a company may not apply to be struck off.
The company must not have traded in the three months prior to making the application. This time restriction can be frustrating for directors who are keen to take immediate steps to close down an insolvent company following cessation of trade.
A voluntary application for striking-off is also not available if the company is subject to ongoing insolvency proceedings or winding-up proceedings have been commenced.
There are safeguards for those who are likely to be affected by a company’s dissolution. If the company has creditors, members, employees etc. they should be informed of the company’s intentions before it applies to Companies House.
The company is required to send a copy of the application on any interested party within seven days of sending the application to the Registrar. This then gives any interested party an opportunity to object to the company’s application.
A company’s application for striking-off is classed as a voluntary application.
It should be noted that this procedure is not an alternative to formal insolvency proceedings where these are appropriate. If the company does not meet the striking-off conditions, then the company will need to be liquidated.
How much does a company’s application for striking-off cost?
What is DS01?
DS01 or Form DS01 is a Companies House form used by a company which is applying to be struck-off and dissolved. The form is named ‘Striking-off application by a company’.
The form can be downloaded from here: https://www.gov.uk/Government/publications/strike-off-a-company-from-the-register-ds01
Who signs form DS01?
The form must be signed and dated by:
- the sole director, if there is only one
- by both directors, if there are two
- by all directors, or the majority of directors, if there are more than two
Who receives notice of the company’s strike-off application?
Within seven days of sending the application to the Registrar, the company is required to send a copy to:
- members, usually the shareholders
- creditors, including all existing and likely creditors such as:
- former employees if the company owes them money
- landlords or tenants (for example, where a bond is refundable)
- personal injury claimants
- HMRC and Department of Work and Pensions
- managers or trustees of any employee pension fund
- any directors who have not signed the form
The company must also send a copy of the application to any person who, at any time after the application has been made, becomes a:
- manager or trustee of any employee pension fund
This must be done within seven days of the person becoming one of these. This obligation continues until the dissolution of the company or the withdrawal of the application.
What does Companies House do with the strike-off application?
Companies House will examine the form and, if it is acceptable, will:
- register the information and put it on the company’s public record
- send an acknowledgement to the address shown on the form
- send a notification to the company at its registered office address to enable it to object if the application is bogus
- publish notice of the proposed striking-off in the London Gazette to allow interested parties the opportunity to object
- place a copy of the London Gazette notice on the company’s public record
If there is no reason to delay, the registrar will strike the company off the register not less than two months after the date of the notice.
The company will be dissolved on publication of another notice in the London Gazette.
Can a company withdraw its application?
Yes. If the company changes its mind or if the company becomes ineligible for voluntary strike-off, the directors must ensure the application is withdrawn immediately.
Section 1009 of the Companies Act 2006 sets out the circumstances in which an application is to be withdrawn.
Form DS02 Withdrawal of striking-off application by company can be downloaded from here: https://www.gov.uk/Government/publications/withdraw-a-striking-off-application-by-company-ds02
When do I resign as company director?
A director should not resign before applying for strike-off as there must be a director in office at the time the Registrar received the application.
Is a striking-off application by an insolvent company likely to work?
Because of the company’s insolvency, it is more likely that a creditor will object to the company’s application for it to be struck off and doing so is a simple process.
In addition, Companies House notify HM Revenue & Customs of the company’s application to establish whether there are any outstanding tax liabilities. If there are, then it is likely that HM Revenue & Customs will object to the proposed striking-off.
If Companies House accept an objection, the striking-off application is suspended, and the directors will need to decide on another route to dissolution.
Are there any risks to directors in making a voluntary application for striking-off?
Yes. It is an offence:
- to apply when the company is ineligible for striking-off;
- to provide false or misleading information in, or in support of, an application;
- not to copy the application to all relevant parties within 7 days;
- not to withdraw application if the company becomes ineligible.
The offences attract a potentially unlimited fine on summary conviction (before a magistrates’ court or Sheriff Court) or an unlimited fine on indictment (before a jury).
If the directors breach the requirements to give a copy of the application to relevant parties and do so with the intention of concealing the application, they are also potentially liable to up to seven years imprisonment as well as an unlimited fine.
Anyone convicted of these offences may also be disqualified from being a director for up to 15 years.
Can the company be restored to the register?
Yes. Regardless of the company having first been in liquidation or not, a company can be restored to the register for a period of up to 6 years following dissolution.
There are no time limits where a creditor’s claim relates to personal injury.
Why would a company be restored to the register?
This could be to bring a legal claim against the company or perhaps an unhappy creditor intends to apply for the company to be placed into liquidation in order for an investigation to be carried out into the directors’ conduct. Another example might be HM Revenue & Customs wanting to investigate a company’s tax affairs.
Insolvency Reforms – Investigating dissolved companies and directors’ conduct
It is acknowledged that no statutory investigation is carried out on insolvent companies which are dissolved without having first been placed into liquidation. This gives rise to an abuse of process as transactions and actions of directors can go undetected and unreported. Whilst a company can be restored to the register, the restoration process and the costs associated with it can present a barrier.
It is therefore not surprising that the Government is considering the process for restoring companies to the register with a view to making it easier.
The Government is also considering extending current investigatory and enforcement powers to former directors of dissolved companies. This would allow such people to be investigated by the Insolvency Service, opening the way for director disqualification and potential prosecution where creditors require a director’s conduct to be reviewed.
Are there any other considerations regarding an application for striking-off?
Yes. Employee entitlements under the Employment Rights Act 1996.
In a striking-off scenario, directors and employees are not entitled to claim for amounts due from the National Insurance fund via the Redundancy Payments Service. In Liquidation, directors and employees could have a statutory entitlement to the following claims:
- Holiday pay
- Wage arrears
- Payment in lieu of notice
- Pension arrears
The Redundancy Payments Service will review any claims and decide whether they qualify for payment in accordance with employee legislation. At the time of writing, the statutory weekly limit is £525 per claim. Redundancy pay under £30,000 is tax free.
If there are employee claims, then it may be advantageous for a company to be placed into liquidation. To facilitate this process, the employee claims could provide a source of funds to meet the Liquidator’s fees and disbursements.
Is it possible to liquidate a company with no assets?
Yes. But the Liquidator’s fees and disbursements will need to be paid. Generally, directors or a third party contribute toward these costs.
Directors and employees may have statutory entitlements to payments from the Redundancy Payments Service which could provide a source of funds to meet these costs.
How much does it cost to liquidate a company?
Prices vary, with firms charging upwards from £5,000 to complete a Creditors’ Voluntary Liquidation.
Some firms of Insolvency Practitioners have specialised in providing low cost liquidations for small companies which have no assets. These firms offer lower fees.
What are the advantages of a liquidation compared to strike-off?
- Access to director and employee redundancy claims via Redundancy Payments Service
- Process can be commenced immediately, no need to wait for 3 months
- Directors can choose which firm of Insolvency Practitioners to engage
- Liquidation provides a formal process to fully wind-up the company’s affairs
- Removes civil and criminal risks regarding voluntary striking-off application
- Any missed assets or creditors can be dealt with by the Liquidator
- Company will be dissolved following conclusion of the liquidation
It is possible to dissolve a company which has no assets without it first going through a formal insolvency process. But it is important to stress that these alternative options bring with them additional risks to directors and may also prevent directors and employees from receiving statutory entitlements under the Employments Right Act 1996.
It may also only be a matter of time before the Government reforms the current dissolution process, making it easier for directors of dissolved companies to be investigated.
When considering how to close down a limited company, it is recommended that the directors obtain professional advice from an Insolvency Practitioner at the earliest stage. The Insolvency Practitioner will review the options available and help the directors to determine the best way forward. Should a Creditors’ Voluntary Liquidation be the preferred option, only a licenced Insolvency Practitioner may act as Liquidator of a company.
Approved Recovery are a firm of Insolvency Practitioners who specialise in providing cost effective Creditors’ Voluntary Liquidations to small companies.
We offer a free initial consultation to discuss your situation, consider the options available and help you determine the best way forward.
Our Insolvent Solutions liquidation service is perfect for small insolvent companies with no assets, with fees starting from £2,000 plus disbursements plus VAT.