Purnells Insolvency Practitioners

Strike Off Application v Creditors Voluntary Liquidation

Given the new landscape we are all living and working in due to Covid-19, I wanted to update a blog that we first produced over four years ago, which looked at the benefits and drawbacks of a Creditors Voluntary Liquidation ("CVL") versus a Strike Off Application.

A CVL is a formal insolvency process designed to bring the life of a company to an end quickly and efficiently under The Insolvency Act 1986.

A Strike Off Application, which is also sometimes called the “SpongeBob Method”, is a process that can be used to bring the life of a dormant company to an end using Section 1003 of the Companies Act 2006. A company is usually defined as being dormant if it has not traded for 3 months or more.

The main points of comparison are as follows:


Price
One of the biggest differences between the two processes is the cost involved.

To pay an Insolvency Practitioner to place a company into liquidation, the average fee is approximately £4,000 plus VAT because there is a large amount of work involved. Not only does all of the legal documentation need to be prepared and issued to the relevant parties, but the Insolvency Practitioner also needs to:

1. Call and hold all of the necessary meetings and decision procedures.
2. Undertake a statutory investigation.
3. Make a report to The Insolvency Service on the conduct of the directors.
4. Realise and distribute the assets.
5. Report to all relevant stakeholders.
6. Remove the company from Companies House.

In comparison a Strike Off Application costs only £10, which is the filing fee charged by Companies House. Whilst it is extremely low cost, if you do the work yourself, there is a specific procedure that has to be followed, and if it is not done correctly the directors could be fined. This is something that Purnells could be instructed to do however, which would ensure that the procedure is followed correctly.


Duration
If a company has already ceased trading for 3 months an immediate application can be made to strike it from the Register. The Registrar of Companies then advertises the application in the London Gazette and if there are no objections within 2 months, the company is struck from the Register. The earliest a company could be dissolved from the Register is therefore 5 months from the date it first ceases to trade although by the time Companies House has received and processed the application, the likely timescales for dissolution would be more in the order of six months from the date on which the Company first ceased to trade.

Furthermore, should a creditor object to the dissolution, during the advertisement period then the application will be suspended for 6 months. After that 6 month period of suspension has expired, Companies House will re-advertise the notice. Without active correspondence with the objecting creditor therefore, the Company can become stuck in a cycle of application and objection.

It used to be the case that HMRC were the main creditor who objected. Now that the majority of companies have obtained a Government backed Bounce Back Loan however, we are finding that banks are also now routinely objecting to strike off applications. This is because it is currently thought that the Government Guarantee will only be honoured in circumstances where companies have been placed into a formal insolvency procedure.

In a CVL, once Notices are signed, the Company is placed into Liquidation approximately 16 days later. The creditors have no say in whether the Company is placed into Liquidation, as this is a decision for the shareholders. A Creditors Voluntary Liquidation therefore provides directors with more certainty and control than a Strike Off Application.


Employee Claims
As a CVL is a recognised insolvency process, The Redundancy Payments Service will pay any valid employee claims for unpaid wages, holiday pay, redundancy pay and notice pay up to statutory limits.

This is also true for directors, as more often than not directors also have employee claims, and the sums realised can be used to settle the costs of the liquidation. If you are a director and wish to see whether you can claim redundancy, follow the link to our website for further information.

As a Strike Off Application is not a formal insolvency process it is not recognised by the Redundancy Payments Service and therefore they will not process and pay any employee claims including those of the directors.


Creditor Pressure
In a CVL, once the Company has entered into liquidation all creditor letters, pressure for payment, bailiff action etc gets passed to the Liquidator to deal with. Creditors will no longer be able to chase directors for the debt due.

With a Strike Off Application however, because it is not an Insolvency Act process, creditors are able to continue to chase directors for payment until the Company has been dissolved, which as indicated above, can take a considerable amount of time to achieve. Furthermore bailiffs and sheriffs can still attend at premises to try to seize company assets. This can become a particular problem if the directors have used their home address as the company’s registered office, as clearly no-one wants bailiffs or sheriffs attending at their home.


Conclusion
A Creditors Voluntary Liquidation is a quicker and more efficient process than a Strike Off Application however, it comes at a cost. Having said that however, if there are assets in the Company, or if the directors are entitled to claim redundancy, then it may be possible for the company to be liquidated at no direct cost to the directors personally.

The dissolution process is far cheaper but takes considerably longer and affords none of the protections and benefits of a CVL, such as the payment of employee claims, creditor pressure on directors being relieved, etc. Also if the Company has a Bounce Back Loan the director may find it is not possible to go down the strike off route and a liquidation may be required, in any event.

That is not to say that the dissolution process is always the wrong process to choose. For some companies it is the perfect choice. That is why there is never a "catch all" solution as to how to deal with your company and we will always provide a free first meeting and letter of advice to clients, which enables them to choose the best route for them having regard to the advantages and disadvantages of each option and their particular circumstances.

Should you wish to discuss Creditors Voluntary Liquidation, Strike Off Applications, or any other insolvency matter, please do not hesitate to contact us on Telephone: 01326 340579, Email: chris@purnells.co.uk

What is a Company Voluntary Arrangement ("CVA") and How it Can Help Your Company?

A Company Voluntary Arrangement, or CVA for short, is a legally binding agreement between the Company and its creditors, which is designed to allow the Company to continue to trade while it sorts out its financial problems.

In its simplest form a CVA is a “deal” or a proposal that is put to the Company’s creditors, who then have an opportunity to vote to approve or reject the proposal.

A Company Voluntary Arrangement usually takes one of two forms, or potentially a combination of the two.


1. Monthly Payments CVA

This is where a set monthly sum is paid into the CVA for a period of three to five years, in order to offer a dividend to the creditors.

2. A Lump Sum CVA

This is where a lump sum is offered to creditors in full and final settlement. This can be from the sale of unnecessary plant and machinery or a lump sum offer from the directors or perhaps an investor who is coming into the business.


A CVA Proposal is drawn up by the directors with the help of an Insolvency Practitioner and is then sent to the creditors. The law sets out the minimum level of information that must be contained in the proposal but not what the offer to creditors should be. Therefore the offer to creditors can be, within reason, whatever the directors want, provided it offers a better return to creditors when compared to a liquidation.

Accordingly, a Company Voluntary Arrangement is an incredibly flexible tool to enable the directors to sort out the Company’s financial affairs. For example we have previously put forward a proposal whereby creditors were given a choice of whether to take a lump sum in respect of a percentage of their debt, or they could choose to exchange their debt for equity, with the entire debt being paid over a period of approximately 7 to 10 years. This goes to show how flexible a CVA is, and how you can really tailor any proposal to the individual needs of the Company and the creditors.

Another advantage of a Company Voluntary Arrangement is that the Company can also apply for a moratorium which gives the Company a breathing space from creditor action. This gives the Company time to call a decision procedure for creditors to consider a proposal and also to seek their views or modifications to the proposal that has been put forward.

A moratorium has the effect of preventing any legal processes against the Company being proceeded with whilst it is in effect. Bailiffs and sheriffs are not allowed to seize the Company’s assets during this time and even a winding up hearing will be adjourned until after the decision procedure.

At the decision procedure for creditors 75% of those voting must vote in favour of the proposal for it to be approved. The voting rules at the decision procedure can be quite complicated, but if you click on the link we have provided an overview of the procedure and rules can be found on our website.

Once a CVA is approved a creditor cannot pursue their debt outside of the arrangement EVEN if they did not vote or had voted against it. All creditors will be bound by the terms of the Proposal.

Given the financial situation the UK is in, following the Covid-19 pandemic, and that businesses, which were successful before the pandemic, will need time to recover, I anticipate that Company Voluntary Arrangements will become more prevalent over the next twelve months.

If you would like a free meeting to discuss Company Voluntary Arrangements and whether they could assist your company, please contact us on 01326 340579 or email at chris@purnells.co.uk

Corporate Insolvency and Governance Act 2020 -
Extension of Temporary Measures

The temporary measures introduced by the Corporate Insolvency and Governance Act were due to expire variously at the end of March and April 2021. The Government announced that it will extend some temporary measures into the coming months as the economy continues to emerge and recover from the pandemic.

The insolvency measures that will be extended are:

• Suspension of serving statutory demands and restrictions on winding up petitions will be extended until 30 June 2021.

• Small business exemption from the termination clause requirement will be extended until 30 June 2021.

• The relaxation of the wrongful trading provisions will be extended until 30 June 2021.

• Temporary moratorium rules for the monitor will be extended until 30 September 2021.

• Modifications to moratoriums being extended to 30 September 2021:

o Companies subject to a winding up petition can access a moratorium by filing papers at court (rather than having to make an application to court).
o Companies who have been in a CVA or administration within the last 12 months can obtain a moratorium (usually they would not be eligible).

The Government has announced that it has commissioned an independent review of the loan charge scheme.

The Loan Charge Scheme has been seen by many as controversial due to the fact that many parties believe that the legislation is retrospective. Accordingly this independent review will be welcome by many people affected by the scheme, which is scheduled to be completed by mid-November.


HMRC’s position on the matter is as follows:

Customers in the settlement process have the option to either pause the settlement process and wait for the outcome of the review before making a decision on settlement or the option of proceeding and finalising settlement before the outcome of the independent review.

For those in the process of settling who have paused settlement, HMRC will continue its existing practice of not charging statutory late payment interest from 1 October 2018, or if later, the month in which the individual provided the required settlement information to HMRC. They will not need to complete an additional information return by 30 September 2019.

The review is expected to conclude in the mid-November and published guidance can be found online at https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review.


If you have been affected by the loan charge scheme and would like to discuss the options available to you, please do not hesitate to contact Chris Parkman by telephone on 01305 458383 or by email at chris@purnells.co.uk

We are thrilled to announce that Purnells are Finalists for the Boutique Insolvency and Restructuring Firm of the Year in The Turnaround, Restructuring & Insolvency (TRI) Awards 2019.

The awards will champion the companies and individuals leading the charge for diversity across the TRI arena.

Here at Purnells we are all very proud to have reached the finalist stage and would like to thank everyone for their continued support.

Winners are to be announced at a black tie award ceremony on 13 November 2019.