Closing your business might be something you’re considering for a number of reasons; it doesn’t have to be because the business is struggling financially.
In fact, if your business is solvent and has no outstanding debts, you do have a choice about how you close it down.
The two main options include striking off the business from Companies House and ultimately dissolving the limited company, or, you could go down the more formal liquidation option, whereby a licensed insolvency practitioner is appointed and carries out the liquidation process, bringing the company to a close.
As professional commercial debt collectors, we work and have experience dealing with companies in both situations and evaluating their position to decide which route is most appropriate for them.
Throughout this post, we look at the differences between strike-off and liquidation, the benefits of each, and some drawbacks.
Company liquidation vs striking off a company
As there are two ways to close down a company, it’s important to evaluate which route is best for you based on your company’s current financial position, i.e., are you solvent or insolvent? Will there be any repercussions for you as a director? Will creditors object to the strike off?
Other areas to consider include looking at it from a financial perspective, in that it does cost more for a company to enter liquidation compared to simply striking off the register; however, the decision cannot solely be based on cost, as in order to opt for striking off, the company must meet certain requirements and criteria.
For example, you will need to consider and understand the business’s current solvency, which is often determined via three tests:
- Cash flow test – can the company meet all debts when they fall due?
- Balance sheet debt – do assets exceed liabilities?
- Legal action – are there any CCJs, for example, against the company?
If you do have any liabilities, then striking off a company will not be an option.
Company liquidation
Liquidating a company is a good option when the company has considerable assets and is insolvent.
To bring the business to an end, liquidation must be carried out by a professional and licensed insolvency practitioner, so it does come with professional fees, which the company is liable to pay.
There are two main types of liquidation in this instance:
Members’ voluntary liquidation – a formal and more structured procedure where a licensed insolvency practitioner will wind the company up. For MVL, the company must be solvent, with the insolvency practitioner making the final distributions to shareholders.
If a business is insolvent, liquidating it through creditors’ voluntary liquidation is the recommended course of action. CVL comes from the company directors as the problems of the business, financially, are beyond the point of rescue. In this arrangement, all creditors are dealt with fairly and will follow the Insolvency Act 1986.
The insolvency practitioner will identify all company assets, deal with outstanding creditors, distributions, etc, and any remaining debt will be written off.
The liquidation decision will be based on what debts you have outstanding.
The main benefit of opting for liquidation is that any remaining unpaid debts will be written off, and there is no personal liability for directors.
Company strike off
Striking off a company vs liquidation is a way to close down a limited company that is no longer required, and there is no need to seek professional advice for strike-off.
In this instance, the directors of the company can request that it be struck off if it has ceased trading or they no longer want to run the business.
There are certain criteria to meet strike off action, these include:
- The company must cease trading for 3 months prior to being struck off
- The company’s name must not be changed in the lead-up to the strike off
- The company must be solvent with no threat of liquidation present
- There are no outstanding agreements with creditors.
If creditors do not object within the timeframe following the strike-off announcement, the company’s name will be removed from the official company register, and it will cease to exist.
Note: If you attempt to dissolve the company while knowingly having unpaid debts, you will encounter objections to the strike off, as it is in the creditor’s best interests to object.
If this is the case and you can’t settle your debts, the company should consider a formal insolvency liquidation process.
A company strike-off is a quick, relatively inexpensive, simple, and informal process.
Some of the disadvantages of strike off include:
- Creditors can oppose the strike off
- The company can be reinstated after being struck off if a creditor makes a claim.
Business debt collection
It’s vital that businesses take the time to fully understand the differences between striking off a company vs business liquidation and use this information to choose the right and most appropriate route.
As an experienced commercial collection agency, we can help businesses with their credit control processes, particularly the collection of outstanding debts and late payments.
Helping to keep your cash flow flowing, we’re a business debt collection agency you can trust.
Speak to a member of our team today.
Read the next article: The Difference Between Liquidation and Administration