It is easy to establish if your Company is insolvent or not. This is determined by the Insolvency Act which carries out several simple tests to ascertain the position of the Company.
For the balance sheet, it is determined by whether your assets are lower than your liabilities, if so then your Company is insolvent. However, if your assets are significantly higher than the liabilities, the Company is in a good position.
The ‘cashflow test’ is determined by whether your Company could pay of all its debt in full. If your Company is in a position to do so, then you are not cashflow insolvent.
If your Company is unable to pay off all its debt in full, it would be insolvent.
What can I do if my Company is insolvent?
If you know your Company is insolvent there is no need to panic, as this may only be a short term problem and maybe easily rectified.
The question at this stage is whether to ‘liquidate’ (wind up the Company) or ‘strike off’ (dissolve the Company) and here we discuss the alternatives:-
‘Strike Off’ – To strike off and dissolve the Company is effectively a significantly cheaper way than to liquidate the Company but is only recommended in particular cases.
‘Strike off’ is carried out by completion of Form DS01 which is submitted to Companies House to advise them that the Company will no longer continue trading. Form DS01 must also be issued to all shareholders, creditors and employees. The application is then advertised in the London Gazette by Companies House (providing there are no objections raised to the ‘Strike off’ within 3 months) the Company is then dissolved. The cost to strike off a Company is a nominal fee of £10.
No legal entity therefore remains and when the Company is dissolved, any assets remaining within the Company goes to the Crown. This is known as ‘bona vacantia’ which means property with no legal owner.
What do I need to consider before I Strike Off my Company?
Before striking off the Company, all Directors have to ensure all final tax returns and accounts are filed, all Company bank accounts are closed and any remaining assets of the Company are disposed of correctly. The Directors also have to make sure that all Creditors have been paid and all employees are dealt with appropriately.
A Creditors’ Voluntary Liquidation (‘CVL’) is then completed and all the Company’s assets are assessed and distributed accordingly to pay all debts and to repay its Shareholders.
Prior to striking off a Company, it must not have any outstanding wind up petitions or be in a Company Voluntary Arrangement (‘CVA’). In addition, the Company must not have been trading or changed its name within the last 3 months.
It is important to note that a strike off cannot be used as a means to avoid creditors. HMRC and many finance creditors monitor the London Gazette on a regular basis to identify any companies that may owe them money.
Would Liquidation of my Company be more appropriate?
The Company is usually put into Liquidation where the situation is more complicated and the Directors may feel there is greater uncertainty regarding the company’s insolvency.
A Company becomes insolvent if either it cannot pay its liabilities when they are due, its liabilities are more than its assets or if a creditor is taking legal action against the company for unpaid debts. Director’s must be conscious of their duty to their creditors and it is important to seek professional advice when doing so.
There are three types of Liquidation:-
- Creditor’s Voluntary Liquidation (‘CVL’) – for insolvent companies
- Compulsory Liquidation – for insolvent companies
- Member’s Voluntary Liquidation (MVL) – for solvent companies where their circumstances indicate that the Company is to be wound up
Voluntary liquidation may be the best course of action when a Company is insolvent, but it is more costly and the Directors may have to cover the fees themselves if there are no assets in the Company.
‘Strike off’ or Liquidation?
Although strike off and liquidation both eventually lead to the closure of a company, the criteria surrounding both vary considerably. ‘Strike off’ should not be used as a way of avoiding Creditors as the Directors may appear to be seen in breach of their fiduciary duties which could have severe consequences.
It is important to seek professional advice and at Navigate Business Recovery we will liaise with the creditors on your behalf and undertake due diligence into any issues that may arise prior to commencement of Liquidation.
Next Step
If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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