Strike-Off vs Creditors’ Voluntary Liquidation: A Guide for Directors
When closing a limited company, directors must choose between strike-off and liquidation. Understanding the key differences between these options is crucial for making an informed decision and avoiding any possible complications.
Determining Your Company’s Solvency
The decision to pursue a strike-off or liquidation relies on your company’s financial position, which is assessed through solvency tests. A solvent company should have evidence that its assets outweigh its liabilities on its balance sheet. There should also be no unresolved legal actions against the company and all outstanding debts must be fully settled.
Strike-Off: The Solvent Option
Strike-off is an option exclusively available to companies that are definitively solvent. To qualify, the company must not have engaged in trading or stock sales within the last three months, nor undergone a recent name change. Additionally, it cannot be facing insolvency proceedings or have any formal repayment agreements in place.
The process places full responsibility for closure on the directors. They must ensure that all remaining assets are distributed to shareholders and all tax obligations, such as Corporation Tax, PAYE, and National Insurance contributions, are fully settled. Final accounts and tax returns must be filed, the payroll scheme closed, and VAT deregistration completed. After the company bank accounts are closed, the directors must submit a DS01 form to Companies House and notify all relevant parties within seven days.
Creditors’ Voluntary Liquidation (CVL): The Insolvent Solution
CVL becomes the appropriate choice when a company cannot meet its financial obligations. This typically occurs when the company cannot pay debts as they fall due, liabilities exceed assets, or the business faces mounting creditor pressure or pending legal actions.
One key advantage of a Creditors’ Voluntary Liquidation (CVL) is the protection it provides against legal action from creditors. This process is overseen by a licensed Insolvency Practitioner (IP), ensuring professional management and full compliance with legal requirements. The IP manages the realisation and distribution of assets while ensuring that all creditors are formally notified of the proceedings.
Find out more about CVLs in our article here.
Important Considerations
Attempting an incorrect strike-off comes with major risks so must be considered carefully. Creditors can object and block the process, and the company may be restored to the register if debts are discovered later. Directors might face personal liability or disqualification, and they lose the right to claim redundancy payments.
While strike-off may be cheaper, CVL offers greater protection despite its professional fees. Eligible directors can claim redundancy payments through CVL, which may offset the costs. The long-term financial implications of an improper strike-off can be far worse than the initial savings.
Making the Right Choice
Strike-off suits companies with clear solvency, where all creditors can be paid in full and there’s no likelihood of future claims. Simple business structures with straightforward affairs often benefit from this approach.
Alternatively, CVL is more appropriate for companies with outstanding debts, those facing creditor pressure, or situations requiring professional protection. Complex business structures or directors seeking redundancy payments should also consider this route.
Before proceeding with either option, seeking professional advice from a licensed Insolvency Practitioner is essential. They can assess your specific situation and guide you toward the most appropriate solution, ensuring compliance with all legal requirements and protecting directors’ interests.
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