Strike Off v Liquidation

Is the company solvent or insolvent?

Can your company pay its debts? That’s the first consideration when deciding to strike off or liquidate your limited company. 

Your company is solvent

Your company is solvent if it has enough assets to cover its liabilities and can repay all its creditors (parties it owes money to, like suppliers or lenders). You can close a solvent company using the Strike Off procedure or a solvent liquidation called a Members’ Voluntary Liquidation (MVL). 

The most appropriate closure method for you will depend on which procedure is the most cost-effective and tax-efficient in your circumstances, which we discuss below. 

Your company is insolvent

Your company is insolvent if it cannot pay all its creditors in full. These tests can help you determine your company’s financial status:

• The cash flow test - Can the company pay its debts when they become due?
• The balance sheet test - Is the value of the business’s liabilities greater than its assets? This test includes debts that may arise in the future.
• The legal action test - Have creditors taken legal action to recover unpaid debts? That includes Statutory Demands and County Court Judgments (CCJ).

If the answer to any of these tests is ‘yes’, the likelihood is that your company is insolvent. You should then seek a second opinion from an Insolvency Practitioner.

If they confirm that your company is insolvent, you cannot use the Strike Off procedure to close it. Instead, you must use an insolvent liquidation procedure. You can close an insolvent company voluntarily using a Creditors’ Voluntary Liquidation, or a creditor can force it into Compulsory Liquidation. 

What happens if I Strike Off an insolvent company?  

If you try to strike off your insolvent company, your creditors can object to the process. Companies House will then suspend your application while it investigates. If Companies House upholds the objection, your creditors can pursue you for the money the company owes. If the company cannot pay the debt, your creditors can force it into Compulsory Liquidation and your role as a director will be investigated. 

If the investigation finds you did not act in the best interests of your creditors or used Strike Off to avoid your obligations to them, you could be made personally liable for company debts or face a directorship ban. 

Strike Off v Liquidation for a solvent business

We’ve already explained that you cannot strike off an insolvent business and must liquidate it instead. But what if your company is solvent?

In that case, you have a decision to make. You can strike it off or close it via a Members’ Voluntary Liquidation. 

How to use Strike Off to close a solvent business

You can apply for Strike Off online or by submitting form DS01 to Companies House and paying a small fee (currently less than £50). 

To be eligible for Strike Off, your company must not:

• Have traded or sold stock in the last three months
• Have changed its name in the previous three months
• Be threatened with Liquidation
• Have any ongoing repayment arrangements with its creditors

However, before you apply for Strike Off, you must wind up the company’s affairs. That includes:

• Making staff redundant
• Selling or transferring company assets
• Submitting final tax returns and accounts
• Informing HMRC that you’re closing the company
• Closing company bank accounts

You can then file your Strike Off application with Companies House, and as long as you have met all the requirements, the company will be removed from the official register after around two months and will cease to exist.  

How to use a Members’ Voluntary Liquidation to close a solvent business 

Unlike Strike Off, a Members’ Voluntary Liquidation is not a process you can manage and implement yourself. Instead, you must appoint and hand over control of the business to a licensed Insolvency Practitioner. Acting as the liquidator, they will wind down the company’s affairs and close the business on your behalf. 

As part of their role, they will value and sell the company’s assets and use the proceeds to repay any creditors before distributing the profits among the shareholders. They will then remove the company from the official register.  

Strike Off v Liquidation - the key differences

Strike Off and Liquidation are both processes you can use to close a limited company, but what are the key differences between them?

Eligibility

• Strike Off - You can only Strike Off a company that has ceased trading and can pay all its debts.
• Liquidation - You can liquidate a solvent or insolvent company. You use a Members’ Voluntary Liquidation (MVL) to close a solvent company and a Creditors’ Voluntary Liquidation (CVL) if it’s insolvent.     

Speed 

• Strike Off - The process typically takes a little over two months from the time you apply to complete, although you need to have ceased trading for at least three months before you apply.
• Liquidation - A relatively simple MVL typically takes three to six months, although it can be up to 12 months for more complex businesses with niche assets. A CVL usually takes six months or more.    

Cost

• Strike Off - Applying for Strike Off costs less than £50. However, there may be other costs, such as an accountant’s fee and potential legal fees. 
• Liquidation - The liquidator’s fee for an MVL typically ranges between £1,500 and £4,000. A CVL is likely to cost between £3,000 and £6,000. The money raised from the sale of assets usually covers the fee. 

Tax efficiency 

• Strike Off - In Strike Off, the first £25,000 of profit is subject to Capital Gains Tax. Anything over that amount is taxed as income.
• Liquidation - All the proceeds from a Members’ Voluntary Liquidation are subject to Capital Gains Tax (CGT). You may also be eligible for Business Asset Disposal Relief, which reduces the rate of CGT you pay. 

Strike Off v Liquidation - which is right for you?

If you’re ready to close your limited company, we can help you determine the most appropriate procedure. With over 25 years of experience implementing Strike Off, Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation procedures, we can guide you through the process and protect your interests throughout. Please get in touch for a free, same-day consultation or to arrange a meeting at one of our 100+ offices throughout the UK.