Contractors, does Companies House restarting voluntary strike-offs affect you?
It’s an overused phrase, but these ‘unprecedented times’ for business-owners and the economy are continuing, even if the government is clearly seeking some return to normality, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.
In fact, a recent announcement from Companies House confirms that it is re-starting the ‘strike-off’ process from September 10th 2020. This is not, however, as drastic a change as might be expected since the announcement refers only to voluntary dissolutions, i.e. ones where a director has consciously applied for their company to be struck off.
It is telling that the gov web page linked to above specifically states that the compulsory strike-off process remains ‘paused’ -- and no estimate is given as to when it may resume, other than to say it is being reviewed on a monthly basis.
What is striking-off?
Striking-off is the process by which a company is dissolved without firstly being in liquidation. As has been discussed by us previously on ContractorUK, voluntary strike-off is one of the options open to a contractor who has ceased to trade and may be appropriate where there are insufficient assets to warrant a solvent liquidation process.
A compulsory strike-off process is one which is instigated by Companies House because of a company failing to meet its filing requirements. Ordinarily this arises when a director fails to file accounts or confirmation statements on time. Where this has occurred, a notice is issued to the Registered Office of the company with a warning that the striking off action will follow after a certain period of time -- if the filing is not brought up to date, after which the process is started.
Where a striking off process action is commenced, a notice will be placed in the London Gazette (and on the company’s filing record), stating that the company will be struck off after a two-month period if no objection is received. This gives any interested party, such as the director, a shareholder, or a creditor owed money by the company, the opportunity to object by notifying Companies House of their objection (e.g. a creditor such as HMRC may object on the basis that they are owed money by the company).
If a valid objection is received, the action will be suspended in order to allow the objecting party to take whatever steps are required, such as a director submitting overdue accounts or a creditor taking debt recovery proceedings.
What is the consequence of striking off?
If striking off occurs, the company is marked as ‘dissolved’ at Companies House and, practically-speaking, it has ceased to exist. It is for this reason that a creditor is likely to object to a striking off, since it can only effectively sue for a debt against a company which exists.
To apply this to a contractor scenario, where a director makes an application to strike-off a company which owes money to HMRC, it is likely that they will object to that in order that they can continue to seek the recovery of that debt. If this is the case, they should seek professional advice as to their options from a licensed insolvency practitioner.
What happens to a limited company’s assets?
Any assets which a company owns at the point of dissolution vest in the Crown as ‘bona vacantia.’ Legally-speaking, this means that they are the property of the Treasury at that point, and there is a government department which deals with the processing of such assets.
In practice, if there is any cash in the company’s bank accounts at the point of dissolution, they will be frozen and in due course the relevant bank will take steps to pay the funds to the government. It is ultimately this which should serve as the primary driver for contractors to keep their statutory filings up-to-date. If they are neglected, then the funds in their bank account will ultimately end up frozen, or in the ownership of the government!
For the above reason, where the appropriate process for a ceased contractor company is striking off, it is crucial that all assets (including cash) are dealt with before the relevant application is made.
While there are processes available to recover funds which have been paid bona vacantia, depending on the route required, they can be costly and slow.
Why would a director apply for striking off?
I briefly discussed limited company cessation considerations in a previous ContractorUK article, but broadly, a director would consider doing so when a company has ceased to trade but there is less than £25,000 of distributable reserves after all liabilities have been paid. Applying for strike-off removes the ongoing costs of maintaining a company, and brings its affairs to a conclusion.
Where assets of over £25,000 are held, ordinarily a Members Voluntary Liquidation (MVL) is the appropriate process, since there is no limit on the profits which can be treated as a capital distribution (and therefore potentially be eligible for Entrepreneurs’ Relief up to the lifetime limit). There is a limit of £25,000 being treated as capital where a strike-off process is used, with any additional balance likely to represent dividend income, and therefore be taxed at a higher rate.
What’s not happened, what’s happened, and what’s going to happen
As contractors may be aware, the Insolvency Bill which I outlined in April has now entered into law, with the suspension to Wrongful Trading and a new ‘Monitor’ process now in effect. Given that the new Monitor regime has been prepared with larger business in mind, contractors will wish to apprise themselves of it should their engager put such a process in place. If they do, the likelihood is that existing invoices will rank alongside other trade creditors and behind liabilities such as employee wages, but payment of invoices for ongoing supply should be received.
What is perhaps more significant to contractors (and welcome in their eyes), is what has not happened. What I am referring to is the proposed implementation to raise the status of HMRC in insolvency proceedings and, also significant, the delay to implementation of IR35 in the private sector. While both have been shelved to December 2020 and April 2021, respectively, recent reports state that both will go ahead as (re)scheduled.
More generally, it is clear that the Covid-19 measures put in place to support the economy have been costly, and that it is almost certain that additional taxation will be required in future. The government has already announced a review into Capital Gains Tax, and inevitably this has led to speculation that rates may increase -- indeed Entrepreneurs’ Relief may be further reduced or withdrawn altogether.
Now is as good as it'll get (so consider acting)
Consequently, if contractors have ceased to trade with their limited company, while the restarting of the voluntary strike-off process may be involved in that cessation, the real consideration from a financial perspective is whether to accelerate your plans, as the current regime is likely to be as good as it gets for some time to come.