What is Compulsory Strike Off?
Striking a company off the Companies House Register, a process known as dissolution, is usually a voluntary decision made by the shareholders and/or directors of the company. They will decide to dissolve the company if they have no further use for it, for example, if they want to retire or the company is a dormant subsidiary of a wider group.
However, it’s also possible for a limited company to be forcibly struck off the Companies House Register. In a process known as compulsory strike off, a third party such as Companies House will petition for the company to be removed from the register, typically for reasons of non-compliance.
If a company has ceased trading, the directors may allow it to be forcibly struck off the register as a quick and inexpensive way to close it down. However, the compulsory strike off of a limited company can have serious consequences for the directors of the company, so it’s important you understand exactly how the process works and what the potential ramifications could be.
Definition of compulsory strike off?
Under section 1000 of the Companies Act 2006, if the Registrar of Companies at Companies House has reasonable grounds to believe that a limited company is no longer trading, he or she can begin the process of forcibly removing it from the Companies House Register. Once a limited company has been removed from the register, it will cease to exist as a business entity.
What are the common causes of compulsory strike off?
A common reason for the Registrar of Companies to believe that a business is no longer trading is if it fails to submit its annual confirmation statement CS01 or file its accounts on time. It’s also possible for a company that is still trading to change its registered address without notifying Companies House. That can cause non-compliance issues that may lead to the start of the compulsory strike off procedure.
Directors of businesses that have suffered a downturn or are approaching insolvency may fail to submit annual accounts as a symptom of the company’s general decline. That can lead to the initiation of the compulsory strike off procedure. If the directors do not act and let the struggling company be removed from the register, they will not be able to claim redundancy pay and other entitlements. They may also face serious consequences such as director disqualification and personal liability issues.
What is the compulsory strike off process?
The first step in the compulsory strike off process is for the Companies Registrar to send at least two formal letters to the company warning that a failure to file its annual accounts and/or confirmation statement will lead to its removal from the Companies House Register. A change in the registered address of a company can mean the directors do not receive these warnings. However, Companies House must have reasonable grounds to believe the company is no longer trading before it can be struck off.
If Companies House receives no reply to its letters, it will then publish a first ‘strike off notice’ in the Gazette, which is the official journal of public record. That will declare that the company is to be struck off the Companies House Register and cease to legally exist in two months. That gives the company directors, its shareholders and third parties creditors such as suppliers and HMRC a two-month window to object to the application. If no objections are received from a third party or the directors/shareholders, the company will be struck off the register and will cease to exist.
As a company director or shareholder in one or more limited companies, it pays to be vigilant. We recommend subscribing to notification services from the Gazette to ensure you don’t miss a strike off notice that’s issued against your business. If you act quickly, that will buy you the time you need to prevent your company from being struck off.
How long does the compulsory strike off procedure take?
From receipt of the first letter from Companies House to the company being struck is likely to take around four months. If directors don’t reply to the initial warning letters from Companies House, they have just two months from the time the first strike off notice is published in the Gazette to save their company. This process was accelerated in 2016. Directors used to have three months following publication of the strike off notice to object to the striking off.
The reduced timeframe to prevent striking off means it’s now crucial that directors file their annual accounts and confirmation statements on time.
What are the consequences of compulsory strike off?
If you fail to respond to warnings from Companies House, your business can be struck off the Companies House Register even if it’s still trading. That can have serious consequences, including:
- The company will cease to exist as a legal entity.
- The undistributed assets of the company and any cash will become ‘bona vacantia’, or ‘ownerless property’, and ownership will automatically transfer to the Crown.
- The business will be unable to secure finance to rescue the situation.
- Future contracts with customers and suppliers will be jeopardised.
- Directors will face investigations into their conduct that could lead to a disqualification from acting as a company director for a period of up to 15 years.
- If the company continues to trade then the directors and shareholders will be doing so without the protection of limited liability, which could lead to personal liability for the company’s debts.
What are your options if your company is served with a notice for compulsory strike off?
In the first instance, if you receive a formal letter from Companies House asking for company accounts or your confirmation statement to be filed and you want to continue trading, you should respond immediately. By doing so and providing the information Companies House has asked for, you’ll be able to prevent further action.
If the process has progressed to the point where a strike off notice has been issued against your company, the action you take will be determined by your plans for the company going forward.
- You’re happy for the company to close
If you no longer have a need for the company and are happy for it to be closed down, you could simply allow the process to run its course. That is only an option if you have no debts or liabilities outstanding, have ceased trading and have realised the company’s assets.
Failure to repay all the creditors before the company is struck off could lead to the company being reinstated by a creditor to face formal liquidation proceedings. That will result in a lengthy investigation into your running of the company, with any wrongdoing potentially leading to your disqualification as a director and personal liability for company debts.
- You want the company to remain active
On the other hand, if you want the company to continue trading, you should send a suspension application to Companies House. Depending on what prompted the strike off notice in the first place, you may be required to file missing accounts or confirmation statements to bring your account up to date. If your application to suspend the strike off application is successful, your company will remain active and continue to trade as usual.
Under what circumstances can creditors object to a compulsory strike off?
It’s not just the directors and shareholders who can object to the involuntary striking off of a company. It may also be in the interests of company creditors such as HMRC to object to its striking off. Creditors are likely to want to apply to object and suspend the application so they can recover the money they are owed before the company is closed. If the company is removed from the Companies House Register, any remaining creditors will have to write off the money they are owed as a bad debt or apply to reinstate the company via a court order, which can be a time-consuming and costly process.
What if you receive a strike off notice and your company has assets?
If you have assets or cash in your company that you want to retain ownership of, you will need to extract those assets before the company is dissolved or ownership will be transferred to the Crown. To do that, you should submit an objection to the involuntary strike off explaining your reasons. If the objection is upheld, you’ll be given the opportunity to transfer the ownership of the assets or sell the assets and distribute the money raised among the shareholders. You can then allow the strike off application to proceed.
However, depending on the value of the assets involved, it may make more financial sense to close your business another way. Liquidate the company via a members’ voluntary liquidation (MVL) may allow you to realise the assets and close the business in a more tax-efficient way.
What if you receive a strike off notice and the company is insolvent?
If the company has debts it cannot afford to repay i.e. it’s insolvent, you might feel like a compulsory strike off is an effective way to close the company down without having to repay its debts. However, waiting to be struck off by Companies House is a dangerous route to take that could have serious repercussions for its directors.
In this situation, HMRC or any other creditors can either object to the compulsory strike off or apply to reinstate the company to the Companies House Register if it has already been struck off. They can then force it into compulsory liquidation in an attempt to reclaim the money they are owed. That will result in a thorough investigation of the business that could lead to a director disqualification and personal liability for company debt.
If your company is insolvent, the safer route to take is to enter into creditors’ voluntary liquidation (CVL). In that case, a licensed insolvency practitioner will be appointed to close the company down and realise the assets for the benefit of its creditors. They’ll also advise you whether you’re eligible for director redundancy payments from HMRC and other entitlements.
Has your company been issued with a Gazette notice for compulsory strike off? If you’d like advice to keep your business trading or want to discuss the most appropriate way to close your company given its financial situation, we can help. Please get in touch with AABRS for your free, no-obligation consultation today.