One of the questions I’m frequently asked is:
“The company has stopped trading. There’s no money left, so can’t we just strike it off at Companies House?”
And the answer is, sometimes, yes.
But where a company owes money to creditors, the answer needs considerably more thought.
I’ve seen directors assume that striking off a company is a cheap alternative to liquidation. It can be, in appropriate circumstances, but it isn’t a way of making liabilities disappear without consequences.
What does striking off actually mean?
A company can apply to be struck off the register under section 1003 of the Companies Act 2006.
The usual procedure involves submitting form DS01 to Companies House, paying £13 or £18 (on/offline su8bmission), notifying interested parties and waiting for the statutory process to run its course.
The company must meet the eligibility requirements. Broadly, it must not have traded or carried on business during the preceding three months, although certain activities connected with closing its affairs are permitted.
Importantly, the company doesn’t have to be solvent to apply.
But that doesn’t mean striking off is appropriate for every insolvent company.
What happens to creditors?
This is where directors need to be particularly careful.
A company applying for voluntary strike-off must send a copy of its application to specified interested parties, including creditors, within seven days.
That includes HMRC where tax or returms are outstanding.
Creditors can object to the proposed strike-off. If Companies House accepts an objection, dissolution may be suspended while the matter is considered.
Simply failing to tell creditors about the application is not an acceptable solution.
Indeed, failure to comply with the notification requirements can constitute a criminal offence.
Does dissolution write off the debts?
Dissolution brings the company’s legal existence to an end, but it does not necessarily bring every matter to a permanent conclusion – you see, a creditor may apply to have the company ‘restored’ to the register.
And if restored, the company is treated as having continued in existence as though it had not been dissolved, subject to the relevant statutory provisions.
That can allow creditors to pursue claims and, in appropriate circumstances, insolvency proceedings.
Therefore, striking off isn’t a guarantee that creditors will simply go away.
What about directors’ conduct?
Dissolution doesn’t necessarily prevent scrutiny of what happened before the company disappeared.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extended the director disqualification regime to dissolved companies. This was done because the government saw that the strike off route was being abused.
Consequently, directors should not assume that avoiding a formal liquidation means their conduct cannot be investigated.
If there have been questionable transactions, unpaid taxes, asset transfers or substantial director’s loan accounts, those matters need addressing.
What if the company has assets?
Before considering strike-off, you will need to establish what assets the company has.
That might include bank balances, debtors, machinery, vehicles, stock, intellectual property or even a debt owed by or claim against a director.
Assets remaining when the company is dissolved typically pass to the Crown as ‘bona vacantia’.
It would be particularly unwise to dissolve a company while valuable assets remain unresolved.
When might strike-off be sensible?
Consider a company that ceased trading some time ago.
It has no employees, no significant assets, no ongoing contracts and no realistic prospect of further business.
It owes a relatively modest amount to creditors, who have been properly informed of the position.
There may be circumstances where voluntary strike-off is a proportionate solution, provided the statutory requirements are met and the directors have properly considered creditors’ interests.
But compare that with a company owing HMRC £200,000, with an overdrawn director’s loan account of £50,000 and machinery recently transferred to another business – that is a very different proposition.
A director should not regard DS01 as a convenient means of avoiding those issues.
What are the alternatives?
Depending upon the circumstances, the options may include:
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Rescue or refinancing: Where the underlying business is viable.
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An orderly cessation: Where the company can settle its liabilities and close without formal insolvency.
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Creditors’ voluntary liquidation: Where an insolvent company requires a formal process to realise assets and deal with creditors (such as employee claims for redundancy etc, or property lease issues).
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Administration or a business sale: Where there is a realistic opportunity to preserve value or rescue the business.
The important point that some IPs (and especially the business development managers of IP firms) fail to being to the attention of vulnerable directors is that liquidation isn’t automatically necessary simply because a company has debts. Equally, strike-off isn’t automatically appropriate simply because the company has stopped trading.
Takeaway checklist
Before applying for strike-off, directors should establish:
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Has the company genuinely ceased trading?
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Does it satisfy the statutory eligibility requirements?
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What does it owe HMRC and other creditors?
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Have all creditors been identified?
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Are there any outstanding employee liabilities?
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Does the company still own assets?
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Are there outstanding debtors or potential claims?
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Is there an overdrawn director’s loan account?
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Have any assets been transferred to connected parties?
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Are creditors likely to object?
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Have all interested parties been properly notified?
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Would a formal liquidation produce a better outcome?
Final thoughts…
Striking off can be a perfectly legitimate way of closing a company.
But it needs to be used for the right reasons.
The fact that a company has stopped trading and has no money in its bank account doesn’t mean there is nothing left to investigate or recover / realise.
My approach is straightforward.
Establish what the company owns, what it owes and whether there are any outstanding matters that need dealing with.
Then decide whether strike-off, an orderly closure or formal insolvency is the appropriate route.
And remember, the cheapest procedure isn’t necessarily the cheapest or best outcome.
And, finally, getting that decision wrong can create problems long after the company has disappeared from the register.
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Can directors strike off an insolvent company with unpaid debts? Paul Brindley explains DS01, creditors’ rights, HMRC objections, director responsibilities and alternatives to liquidation.
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