Company dissolution (or company strike off) is basically one of the means of formally shutting down a company and eliminating its record from the Companies Register.
It is possible to dissolve a company either compulsorily or voluntarily. Even though in this article, we will primarily focus on compulsory dissolution, we will also be discussing voluntary strike-off.
Company dissolution or strike off is not the same as company liquidation (otherwise known as company wind up). Liquidation consists of selling company assets to pay off financiers. Strike off typically occurs after the process of liquidation; nonetheless it may also happen in the absence of accompanying liquidation. To get further information on the liquidation process, visit the official government web page.
How do I differentiate voluntary strike-off from compulsory strike-off?
Commonly, voluntary dissolution is the result of an active managerial decision of a firm to dissolve and eliminate it from the Companies register, potentially due to the company going into liquidation. On the contrary, compulsory dissolution can be considered as an eventual outcome of not being able to file confirmation statements (formerly recognised as annual returns). Here, the Companies House basically assumes that a firm is no longer required and hence decides to dissolve it entirely.
Now, let us look at the difference between compulsory and voluntary strike-offs:
A business that is no longer trading may want to request that it be dissolved by Companies House. Some of the reasons for this might include:
- Directors would like to retire and there is no other individual able or willing to take over
- A business is a subsidiary that is no longer necessary
- The failure of the business idea
Before a company is voluntarily dissolved from the register, a few requirements must be fulfilled:
- The company must not have sold/traded any shares during the past 90 days
- The company should not have changed its names during the past 90 days
- The company cannot be alarmed with liquidation as of now
- The company must not have had any negotiations with financiers
- It is necessary that the company directors who are applying for voluntary dissolution hand out the application copy inside “7 days of making the application, to each individual who at any given moment on that day is a shareholder or partner, a creditor, an employee, a manager, or a director (without an application form)”
Under the 2006 Companies Act, section 1006, if a person is unable to hand out the copies of this form to all associated parties within the specified time, it may result in a conviction with a fine and/or up-to 7 years’ imprisonment.
As opposed to a voluntary strike-off instigated by a firm, compulsory strike-off can be imposed upon a firm by Companies House. Typically, this can be seen as the ultimate result of a continued failure to file annual accounts and confirmation statements. The company would no longer be considered to be trading and hence steps can be taken to dissolve it entirely.
Compulsory dissolution is carried out under the 2006 Companies Act, section 1000. A strict procedure needs to be followed n in the event of compulsory strike-off. This offers an opportunity for the firm to protest the proceedings, thus preventing it from being dissolved by the Companies House.
Understanding the process of compulsory dissolution
This process, as previously mentioned, is set out under the 2006 Companies Act, section 1000, as given below:
(1) “In case the registrar has a definite cause to conclude that a business isn’t in operation, they might send a notification to the company inquiring if it’s still operational or not.” This may be the result of directors not being able to submit yearly accounts or confirmation statements in a timely manner and disregarding preliminary warnings from Companies House.
(2) “In case the registrar doesn’t get any response within 14 days of sending their communication, they must within 14 days post-expiration of the period send another notification to the given company mentioning the initial communication, and announcing a) that they haven’t received any response to it, and b) that in case they don’t receive any answer within 14 days of the next communication, a warning may be published indicating a strike off of the name of the company from the register.” Thus, directors will get adequate time to react as well as prevent the registrar from proceeding with the compulsory dissolution of the firm.
(3) “In case Companies House (a) receives a reply to an extent that a company isn’t operational, or (b) doesn’t receive any reply within 14 days after second notification, Companies House might send the company another communication stating that after expiration of 60 days from the notice date the company’s name will most probably, except cause is mentioned otherwise, be eliminated entirely from the register.” Basically, this is the final opportunity for the company to avoid compulsory elimination from the register.
(4) “Once the time stated in the notice has expired, the registrar might, except a cause is shown, eliminate its name from the Companies Register.”
(5) “A notice needs to be published within the Gazette by the registrar stating elimination from the register.” This step is the final confirmation that the company is eliminated from the register.
(6) “Once the notice has been published in the Gazette, a company will most probably be dissolved.” Even though the company is dissolved by this time, the liability of partners, managing officers, and directors, managing stays (under section 7(a)). Besides, the court may still be able to wind up a business that is already dissolved (under section 7(b)).
Side note: With regard to compulsory strike-off, the notification periods were cut off by the 2015 Employment Act, section 103. This means that directors will get less time than before to stop their business being forcefully dissolved by the registrar.
I’ve Already Received the Compulsory Dissolution Warning – What Steps Must I Take?
You have 2 main options to prevent a compulsory dissolution from happening:
Respond to the registrar as soon as possible, stating that your company is still operational and trading. Besides, ensure that you are familiar with other steps that may be taken for rectifying any negligence in submitting the yearly accounts and/or confirmation statements. Individuals who require additional time for getting their accounts in order may ask the registrar for additional time.
Make sure both your confirmation statement as well as annual accounts are forwarded to the registrar without any delay.
The downsides to a compulsory strike-off
All of the assets of a dissolved firm are likely to be considered as ‘bona vacantia’. Thus, they will automatically become official Crown property. This includes any cash in the bank account of a firm (that will most probably be frozen).
The company does not exist anymore; one of the biggest consequences of a compulsory dissolution is that after a company is dissolved, it will no longer exist as an ‘official entity’ and is hence no longer able to perform any legal company functions.
Directors – compulsory dissolution may trigger an enforcement action against the directors of a company independently, along with the company. You must also remember that you may face a criminal charge if you are unable to provide annual accounts and confirmation statements, and the company directors may be fined individually or even prosecuted. Also, former company directors may also face reputational damage and also face numerous challenges when forming a new firm in the future. At times, directors might even be disqualified.
Damage to online reputation – as compulsory dissolution action becomes visible in the public domain (i.e., notice will most likely be published in the Gazette), it might produce a negative impact on the firm, even in the event it is not dissolved in the end. So, it is important that you file both the annual accounts and confirmation statements promptly. Also, you may want to utilise any tools that assist in this procedure such as services related to Confirmation Statements available online.
Personal debt liability – where a company that has been struck off proceeds with its trading operations, directors and shareholders may be considered to be trading without limited liability protection since the LLC no longer officially exists. Hence, they are likely to be held individually accountable for any bills incurred during the trading period.