What is the Difference Between a Compulsory and a Voluntary Strike Off?

August 2, 2023 / Business Insolvency

While there are many ways to close a company, one of the simplest methods is to request to remove it from the Companies House register. This process is called a company strike off, sometimes referred to as dissolution. While it may be a simple and cost effective way to close a company, it’s often not the most tax efficient way to do it (for those with assets) or an option open to those with debts. Though simple enough on the surface, the process gets a bit more complex, as it can be separated into two types – compulsory and voluntary.

In this article, we will discuss the strike off process, and outline the differences between a compulsory strike off and a voluntary strike off.

What is a company strike off?

A company strike off is a cost-effective way to close down a company. It is initiated by a DS01 form, which must be sent to the Companies House to begin the process. Assuming it is accepted and uncontested, your company will be struck off the register, ceasing to exist at the end of the process. If there are assets in the company, these will pass to the Crown and not the shareholders. As such it’s important that you deal with any assets before submitting a DS01 form.

However, the details of a company strike off depend on the type. There are significant differences between a compulsory strike off and a voluntary strike off, making it important to know the difference.

Voluntary strike off

A voluntary strike off is initiated by the directors of the company in question. It can be done for any reason, from lack of profitability to retirement. In order to commence a voluntary strike off, your company must meet a few criteria:

Assuming your company meets this set of criteria, you can submit a DS01 form and begin the strike off process. This process can be lengthy, starting with a notice of the strike off being posted in the Gazette. This allows for objections to the strike off from third parties, such as unpaid creditors, for a period of two months. If no objections are made, your company will be closed.

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Notify HMRC

Before you close your company, there are a few obligations you must uphold. First, you must ensure you notify HMRC, and supply the final set of annual accounts. Any outstanding liabilities, such as tax, utilities, and debts, must be paid completely. With your liabilities covered and the necessary people notified, you can begin disposing of company assets, draining accounts, and extracting retained profits from your company. The profits from said assets and accounts will need to be distributed amongst shareholders. Any assets or accounts that remain upon the closing of the company will be transferred to the Crown. This is known as Bona Vacantia.

With your documents submitted and assets disposed of, your company will be struck off and cease to exist. Though the process does take some time, it is fairly straightforward, provided you keep within the clear legal boundaries. With a compulsory strike off, however, things can become far more complicated.

Also Read: ESC C16: What Is It & How Does It Affect The Strike Off Process?

Compulsory strike off

A compulsory strike off is the less desirable of the two. It is initiated by a third party, most often the Companies House as a result of a failure to file company accounts, but can be triggered by existing creditors too. Should it be left uncontested, a compulsory strike off will similarly result in the closing of a company.

Though a compulsory strike off is often unintentional, with a company’s directors being unaware of the situation, it can be done purposefully. A company that is no longer trading can be left alone, being wound up once it has been forced into a compulsory strike off. Though a compulsory strike off may seem without issue, even tempting to directors with a particular dislike of administrative work, it can lead to serious consequences, as we will discuss later.

Before a compulsory strike off is initiated, the Companies House will send at least two letters to the company. These letters will usually be to demand un-submitted annual accounts, though they can include other discrepancies. Should the Companies House receive no response within 14 days from the first letter, a second will be sent. If another 14 days elapses without response, the company will be forced into a compulsory strike off, with a notice being posted in the Gazette. This can be contested by the company directors, shareholders, and outstanding creditors. If your company has been placed into a compulsory strike off, you can object, allowing you to stop the strike off by meeting certain demands. This usually means supplying absent annual accounts, though it can include other actions.

If no objections are made within two months of the Gazette notice, the company in question will be closed.

Why you should avoid compulsory strike-off

Allowing your company to be closed via a compulsory strike off is not the best of ideas. While it will certainly result in the closing of your company, it will not offer any of the benefits present in the other methods. In fact, it can be actively detrimental to your company, its shareholders, and your future career as a company director.

This potential detriment comes in the form of serious penalties that can apply to directors, should their companies be closed via compulsory strike-off. They can be applied to directors that are found to have engaged in misconduct, or have otherwise purposefully mismanaged their companies for personal gain. These penalties will be determined by the Insolvency Service, depending heavily on the scenario at hand and how directors have acted. As such, some cases will not see any penalties be imposed, while others may see several at a time. The penalties the Insolvency Service may impose include the following:

  • The disqualification of a director’s license for a period of 2-15 years. This disqualification extends to other senior positions, both in companies owned by the penalised director and otherwise.
  • Fines as appropriate given the severity of director misconduct.
  • An order to repay the company in question a set amount. This is typically ordered in cases where the company has illegally issued dividends.
  • Personal liability for outstanding company debt.
  • Prison sentences commensurate with the severity of director misconduct.

Due to the severity of the penalties detailed above, it is generally in a director’s best interests to avoid allowing their company to be closed via a compulsory strike off. While these penalties won’t be applied in every case, it is better to completely avoid the risk and close a company through other means.

What is the difference between compulsory strike off and voluntary strike off

There are a few major differences between a compulsory strike off and voluntary strike off:

  • Initiation – The first and most obvious difference is in how the processes are initiated. With a voluntary strike off, company directors can begin the process at will, with the filing of a DS01 form. A compulsory strike off does not need the input of company directors, and can be initiated by a third party, assuming there is a valid reason.
  • Requirements to begin – A compulsory strike off is not bound by the same requirements as a voluntary strike off. Your company does not have to cease trade or be solvent for a compulsory strike off to begin. Conversely, if your company is insolvent, it cannot apply for a voluntary strike off. Other methods, such as a Creditors’ Voluntary Liquidation (CVA), will be required.
  • Consequences – With a voluntary strike off, the only consequence is that your company will be closed. You will not face any damages or liability as a result of the process. With a compulsory strike off, however, this is not the case. It is a criminal offence to not submit your annual accounts, which often means an investigation will accompany the process. This is especially true if it has been instigated by an unpaid creditor. If this investigation finds malpractice, company directors can expect to be disqualified from management positions, be held personally liable for company debts, and possibly even face prosecution. This, in addition to the accompanying reputational damage, makes a compulsory strike off something to be avoided.

The similarities between a compulsory strike off and voluntary strike off

Though there are significant differences between a compulsory strike off and a voluntary strike off, the two do share some key elements:

  • Assets left within the company will be transferred to the Crown – As we mentioned earlier, leaving assets or accounts as part of a company will see them transferred to the Crown upon its closing. This is known as Bona Vacantia, and is true for both a voluntary and a compulsory strike off. It is best to dispose of all assets in the company beforehand. Unless you want to donate to the public purse.
  • The company will be closed – Though the conclusion of each process differs. Both will result in the closing of a company. The company in question will be struck off from the Companies House register, and will cease to exist as a legal entity.

Alternatives to company strike off

Although a company strike off can be an excellent way to close a small, solvent company, for other companies, it isn’t always the right option. The advantages of a company strike off do not lend themselves well to larger companies with vast reserves of retained profits, and it simply isn’t an option for insolvent companies. If you are the director of companies in either of these circumstances, you’d be better served looking for alternative methods of closing your company.

Members’ Voluntary Liquidation

If you are the director of a solvent company with a large reserve of retained profits, a Members’ Voluntary Liquidation (MVL) could be a great solution. It is a procedure that specialises in assisting large solvent companies, or companies that have assets that outweigh their debts, to close. In doing so, company directors can enjoy several noteworthy benefits.

By placing their company into an MVL, directors are able to appoint a licensed insolvency practitioner to carry out the process. This insolvency practitioner will ensure the efficient and orderly liquidation of the company, and take pains to sell assets at the highest price possible. The proceeds of these asset sales will then be distributed amongst shareholders, assuming there are no outstanding liabilities. Once all distributions have been made, the company will be wound up.

Liquidating a solvent company via an MVL grants more than just an efficient means of closing. The procedure is incredibly tax efficient, meaning that shareholders will save a significant amount on tax expenses. These savings become more prominent as the company’s retained profits increase in size.

The tax efficiency of the MVL process comes from two main factors. First, any gains that are made from disposing of assets will be taxed under Capital Gains Tax (CGT) rates, rather than Income Tax as under other procedures. CGT rates are considerably lower than Income Tax rates, making for a hefty saving. The second factor is Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief. This relief entitles shareholders to further tax reductions on gains, up to a lifetime limit of £1 million. Combined, these two factors can reduce your tax rates to as low as 10%.

Creditors’ Voluntary Liquidation

Where an MVL is an excellent method of liquidation for solvent companies, Creditors’ Voluntary Liquidation (CVL) is an equally strong option for insolvent companies. It is a voluntary form of liquidation for insolvent companies, allowing directors to appoint an insolvency practitioner of their choosing to the role of liquidator. While in this role, the insolvency practitioner will take full control over the company, liquidating its assets and distributing the proceeds amongst outstanding creditors. If any debt remains outstanding after all funds have been distributed, it will be written off. Debts secured by personal guarantees will remain outstanding, however.

In addition to an efficient method of closing an insolvent company, and the writing off of unpayable debts, the CVL procedure offers another key benefit. This benefit comes in the form of legal protections. Once the procedure begins, the company in question will be protected from any legal action coming from outstanding creditors. This essentially prevents compulsory liquidation for the duration of the procedure, sparing directors the negative effects it brings. Furthermore, closing via a CVL demonstrates that directors are ready and willing to act in the best interests of their company’s creditors. This goes a long way in preventing accusations of misconduct, and can be a powerful defence if such accusations ever reach the courts.

Clarke Bell can help

If your company is in financial difficulty, it might be time to consider closing. We have over 28 years of experience in helping companies find the most favourable method of closing. To find out what we can do for you, contact our team of specialists today.