Companies can close in a variety of ways. One of the more devastating ways is through a compulsory strike-off. This happens when a company is legally removed from the register of the Companies House. A director can initiate a strike-off which is typically a voluntary process through which they can dissolve a business. A compulsory strike-off, however, does not depend on the decision of anyone associated with the company but on external parties and there are a variety of reasons why this happens. Keep reading to find out what a compulsory strike-off is, why it happens and if there is any recourse for businesses that are at risk of dissolution.
Compulsory Strike Off An Overview
A compulsory strike off is initiated by someone outside the business, and it results in the dissolution of a business. A company has to go through this process if the Companies House has reason to suspect that a company does not trade anymore, that the business is non-compliant, or for other reasons.
Reasons for a Strike Off
There are two main ways companies get struck off. We have already mentioned compulsory strike-off, but there are also voluntary strike-offs. Voluntary strike-offs are initiated by a director or shareholders for a variety of reasons. One of the more common ones is shareholders and stakeholders seeing no reason to continue the business and thus deciding to shut it down to start another or to move on.
When directors retire, there might not be anyone with the knowledge, experience, and expertise to keep the business going. Since the business would likely fail anyway, the best option is a strike off.
A compulsory strike-off, the focus of this discussion, is initiated by someone not associated with the business, usually someone from the Companies House or the registrar. Businesses can be struck off if they do not fulfill some legal requirements, when there is no clear director at the company, if the company is no longer trading, and if it does not submit its accounts in a nine-month period.
How a Compulsory Strike Off Works
The first thing that will happen after someone puts forth a petition for a compulsory strike-off is the business receiving two formal warning letters. These letters are meant to alert the business of what it is doing wrong or not doing so that it can rectify them and become compliant. If the business does not try to sort out the reason for the warnings or get in touch with the registrar, the compulsory strike-off process starts.
The process starts with one Gazette notice for the request for a strike-off. Once Gazetted, any person, whether inside or outside the business, has two months to file an objection to this application. If you do not respond, a strike-off is initiated, and the company ceases to exist. There is no chance for an appeal or dispute at this point, any funds inside the business will be unavailable, and the director may be investigated to find out what happened.
Stopping a Compulsory Strike Off
If you do not mind the business ceasing to exist for reasons like insolvency, you do not have to do anything. The registrar will do everything for you and the company will be dissolved. This only applies if you do not have debts and there are no assets tied up in the business. If this is the case, you will need help.
The best way to stop a compulsory strike-off is by responding to the notices or warnings the business receives. Next, the business has to try to be compliant and remain in touch with the Companies House to ensure they approve of the changes being made. Importantly, document all correspondence with the Companies House and keep all files and evidence of the changes you are making up to date.
These details will include evidence of compliance, trading, and changes to business management in case the strike-off was initiated due to a lack of a director. Just remember that you are trying to keep the registrar happy to avoid a strike-off.
You should also issue an application to suspend the request if you wish for the business to continue trading. If you have enough proof that you are or can become compliant and that the business is viable, a suspension may be issued.
Three parties can issue this request: the director, the shareholders, and outstanding creditors. Creditors are especially motivated to stop this process because they want to recover their money. You cannot recover money from a business that no longer exists.
Dealing with Assets
As for assets, the Crown takes ownership of all assets including cash. If you want to get these assets back, you have to submit the objection application yourself. If it is successful, you get the chance to continue trading, moving the assets out of the business, and applying for a voluntary strike-off. The potential for an objection from creditors still exists even in these circumstances.
Why You Want to Avoid a Compulsory Strike Off
The best reason why you want to avoid all this is so that you do not lose the business. The business may be going through a hard time such that you are unable to meet obligations. If you want the business to continue, you have to stop the strike-off by either responding to the warning letters and being compliant or objecting to it.
Second, a compulsory strike-off prompts an investigation. The investigation can go either way, especially when you have given other managers lots of power that they abused without your knowledge. You are ultimately responsible for the business, and this is why the investigation will likely focus on you.
When you build a business, you might think of your exit strategy, but no one wants to think about the business getting dissolved. It is, therefore, better to do everything you can to avoid a compulsory strike-off, especially when there are assets, history, and cash on the line.