A useful alternative to striking off

October 13, 2008

SOLVENT LIQUIDATIONS – A USEFUL ALTERNATIVE TO STRIKING OFF?

It is often an outcome of corporate restructurings that certain subsidiary companies are rendered redundant or surplus to requirements. To save the costs of administering these subsidiaries, a group will often seek to have them removed from the register by using the "striking off" procedure (further explained below).

A Members’ Voluntary Liquidation ("MVL"), is a procedure found in the Insolvency Act 1986, which allows a company to be wound up but on a solvent basis.

It may, on occasion, prove a more efficient and certain means by which to shed an unwanted subsidiary.

"Striking Off"

In short, the appeal of the striking off procedure (set out in sections 651-658 Companies Act 1985) is that it is cheap, straightforward and requires little in the way of substantive documentation.

It should be noted that if a company fails to meet its statutory filing obligations, Companies House may also instigate a compulsory rather than voluntary striking off. This may also be accompanied with financial penalties for failure to file.

The voluntary Striking Off Procedure

Following a board meeting, at which a majority of the directors approve an application for striking off, an application is made to Companies House using a Form 652a.

Within 7 days of making such application, the directors must send a copy of the application to all members, creditors, employees, directors (who have not signed the application) managers/trustees of any employee pension fund. An application for striking off will not be permitted, if within the preceding 3 months the company:

(i) traded or otherwise carried on in business; or
(ii) disposed of property which it held for the purpose of disposal for gain in the ordinary course of business.

Companies House will publish a notice of the proposed striking off in the London Gazette and invite objections. Companies House will then strike the company off not less than 3 months following the notice and upon publication of a further notice, the company is dissolved.

Drawbacks

This procedure is less than ideal in situations where:

(i) the company has traded up until the time of a restructuring;
(ii) the group wants certainty as the company can be restored to the register at any time up to 20 years after the a striking off;
(iii) there are assets within the company (which will be vested in the Crown).

In which case it may be worth considering:

Members' Voluntary Liquidation

The MVL is also a relatively straightforward procedure and will bring about the solvent winding up of the company by a liquidator (who must be a licensed insolvency practitioner) appointed by the members.

The MVL Procedure

Should the board resolve that it is appropriate for the company to be put into liquidation by this route, then a list of the company’s assets and liabilities should be  compiled. Then:

(i) the directors must make a statutory declaration of solvency to the effect that the company is able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up. If they did not have a reasonable basis for making such a declaration they may be personally liable;
(ii) the winding up commences from the passing of a special resolution of the shareholders in an EGM. The liquidator is appointed by ordinary resolution at the same meeting;
(iii) notice of the liquidator’s appointment and the passing of the resolution to wind up must be filed with the Registrar and advertised in the London Gazette;
(iv) following the last date for proving debts (not less than 21 days) distributions may be made to the creditors and thereafter to the members.

Once the affairs of the company are fully wound up, the liquidator makes his final account and calls a general meeting. The meeting is called by advertising in the London Gazette at least one month before the meeting. Once the meeting has been held, the liquidator then sends the Registrar the final account and a return. The company is automatically dissolved 3 months after receipt of the final account and return by the Registrar.

MVL or strike off?

Although the obvious downside of a MVL is the cost associated with a liquidator, there are several notable advantages:

(i) greater degree of certainty potential ongoing liability of only 2 years (for the dissolution to be attacked) compared to 20 years under a striking off;
(ii) much of the necessary documentation can be prepared in advance as part of the reorganisation planning process;
(iii) an MVL order can be obtained in a quicker time frame than a strike off;
(iv) the involvement of an insolvency practitioner to ‘manage’ the process.

Fox Williams LLP is a business law firm based in the City of London. We are dedicated to providing clients with the highest quality of legal service.

Please contact Paul Taylor if you would like to know more about any of the matters mentioned in this article or simply to discuss our particular approach to your legal needs. Paul can also recommend licensed insolvency practitioner who will agree a very reasonable fee for un-complicated MVL work.

Paul is a partner in our Corporate department and advises clients on a broad range of business areas, including mergers and acquisitions, joint ventures, private equity, banking and insolvency.

Paul Taylor
Email: ptaylor@foxwilliams.com
Telephone: 0207 614 2512


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