One of the aspects of company life that people often seem surprised about is that companies can also have an ending and that directors can choose the time and manner of the closure.
It’s an interesting statistic that 30 years ago the average lifespan of a business on the NASDAQ was 30 years and today it is only 12, which suggests that not only is the active time of the business likely to be less but that there are many more closures of businesses than there used to be.
Those closures can be for any number of reasons; perhaps the business has been sold with the trading style and assets transferred to the new parent or maybe the firm has got into difficulties and has to be liquidated. The manner of the closure though makes all the difference.
One method is the Voluntary Strike Off or VSO.
This is a pretty simple method of applying to Companies House for the listing of the company to be removed from the register of companies, effectively ending the life of the entity. Directors do this in what seems at first glance to be the simple matter of completing and returning form DS01.
The problem is though that this is only appropriate if the company has no assets or liabilities and trying to strike off a non-dormant company is likely to cause problems.
The first major issue is that of the remaining assets in the company. Where the business still retains assets, whether they be traditional fixed assets such as machinery, vehicles or computers or if they are intangibles like brand names they will fall into the Bona Vacantia rules on dissolution.
Bona Vacantia or “ownerless goods” is the concept of unowned items reverting to the ownership of the crown. Directors could easily face the prospect of the laptop on which they are completing the strike off documentation being returned to the ownership of the government!
Clearly, in this case, the VSO is unlikely to be an attractive option.
Another sticking point in the VSO method is where the business has liabilities.
It is possible that the directors may take the view that the company is not insolvent as it has assets that exceed its liabilities and so VSO is correct; however, this is unlikely to be the view taken by creditors of the business once the company is closed down they will have no way of collecting debts due.
This is the standard position taken by HMRC and if any money is owing they will habitually lodge an objection to the striking off, which will halt the process.
At first sight, the form DS01 doesn’t look too onerous but there are some very specific things that need to be done (and done in the right order) to ensure that the strike off cannot be challenged.
There are also a whole series of situations when a VSO isn’t allowed and for a little bedtime reading, we’d suggest sections 1004 and 1005 of the companies act 2006. Typical examples of these would be where the business has changed its name or traded in the last three months or where bearer shares are in existence.
Suddenly what seemed like a simple and straightforward matter becomes a lot more complex.
The problem then is that once creditors realize that there is a prospect of losing what they are owed they may well choose to launch action to compulsory wind up the business in which case the directors will immediately lose all control over the process.
So what is the alternative?
Another option is that of a Creditors Voluntary Liquidation or CVL. This is where the directors initiate the process to wind up the business, allowing them to choose the timing of the process and at least a measure of control over the final destination of any assets held.
Again this is a structured process and steps have to be taken in the correct order to ensure their validity but a good insolvency practitioner will be handling this so the directors need not worry.
Once the directors have made the decision to close the company and not to carry on trading they should immediately contact Company Liquidation Services to talk through the options.
If a CVL is deemed appropriate a shareholders’ meeting will need to be held where the directors will report that the business is insolvent and recommend a CVL. It’s at this point that the insolvency practitioner will take over.
They will prepare a fairly brief report detailing the affairs of the company. This will then be sent to the creditors and they will be invited to a ‘virtual’ meeting. Interestingly this does not need to be a physical meeting which means that the directors will not need to face the stress of attending.
The liquidator will then take steps to collect out any remaining debts owed to the business, handle employee claims and distribute the remaining cash to creditors.
The practitioner will also be required to liquidate any remaining assets of the business and this is where a director may choose to become involved. If there are assets that the former directors would like to keep then they can negotiate to buy them back. This is particularly useful for intangibles such as trade names or brands as they are likely to have no value to anyone else but the director concerned may wish to continue at least some aspects of the business in a new company.
The liquidator is also charged with compiling a report into the conduct of the directors which, given that they have been entirely sensible in appointing a qualified insolvency professional should not raise any issues.
Once the final distribution of cash is made to the creditors and the administrative aspects are complete then the liquidator will finally apply for the company to be struck off the register at Companies House and the life of the legal entity will be over.
As we can see there are some significant benefits of a CVL. These include;
- Directors can be protected from charges of wrongful trading
- Debt collection action ceases
- Directors can ‘move on’
- Directors retain a measure of control
- Process handled by a competent professional
- Former owners can buy assets back into a ‘NewCo’
- Directors can claim redundancy and statutory payments (see our article on this http://cfscapitalgroup.co.uk/directors-claims.html)
As we can see a CVL can be an attractive option for directors who want to bring an end to the life of a troubled business. It is vital that qualified and experienced advice is taken early to give the most options at what is after a difficult time.
Contact Company Liquidation Services today. Our experts are here to give you honest and professional liquidation advice, whatever your situation.