Striking off, or dissolving a company, is the final process in removing a company from the register of companies at Companies House when a company is being wound up. It is also an option where the directors or shareholders decide not to wind up the company or make use of another insolvency process. The Registrar of Companies can also strike off a company from the register for failing to file accounts or a confirmation statement.
ESC C16
Extra statutory concessions have been used in a variety of areas of tax law to assist in the administration of the collection of taxes. ESC C16 was an extra statutory concession which was available where a company was struck off. When a company makes a distribution to shareholders, the usual rule is that this is considered income and so is taxed as a dividend. However, distributions to shareholders in members' voluntary liquidations ("MVL") are taxed as capital and not income. ESC C16 allowed shareholders to be treated as having received a capital distribution where a company was struck off rather than being placed into members' voluntary liquidation. The striking off procedure was much cheaper than a MVL and ESC C16 allowed the shareholders to benefit from the lower rate of tax on capital distributions as opposed to the rate of tax on dividends.
ESC C16 was withdrawn from 1 March 2012. Under the Enactment of Extra-Statutory Concessions Order 2012, from March 2012 distributions to shareholders were only to be treated as a capital distribution if the amount of the distribution was £25,000 or less. If the company had reserves of more than £25,000, then the shareholders would only receive a capital distribution if the company was placed into MVL.
Application to strike off
However, the striking off process is much cheaper than liquidating a company. Over the years, since the introduction of the Companies Act 1985, many thousands of directors of companies which have become insolvent have used the striking off process. During the first 3 months of 2021 almost 40,000 companies were dissolved.
The process involves the directors completing a form DS01 to request that the company be struck off with a fee of £10. The form contains a declaration that the provisions of sections 1004 and 1005 Companies Act 2006, which set out the circumstances where an application to strike off can't be made, do not apply and that the directors have complied with the requirements of sections 1006 and 1007 Companies Act 2006, which set out the parties who must be provided with copies of the application, including shareholders, employees and creditors. The form also makes it clear that the directors must send a copy of the form to all the company's creditors.
Whilst the form stated that it was an offence to knowingly or recklessly provide false or misleading information on the application to dissolve a company, the process of striking off a company was often abused and creditors were often not provided with a copy of the form DS01. Even if the form was circulated to creditors, the only action which a creditor could take was to request the suspension of the striking off. A suspension usually lasted a maximum of 6 months, after which Companies House would generally restart the striking off process. Creditors would generally only become aware of this only in the rare cases where they monitored the company's entries at Companies House or when they issued claims against the company only to then discover that it had been dissolved.
Consequences of dissolution
When a company has been struck off, it no longer exists, unless it is restored to the register. If a company is restored to the register, there is a legal fiction that the company is deemed to have always existed.
The main issue where a company has been dissolved is that any property belonging to the company becomes bona vacantia. If a creditor or a third party wishes to take action against the company or its directors, they have to apply to restore the company to the register before any further action can be pursued. This amounts to a barrier to claims in respect of the company which might otherwise be pursued. In addition, there were no grounds for the directors being pursued under the Company Directors Disqualification Act 1996 as the Act only covered directors of insolvent companies and did not cover directors of companies which had been dissolved.
Directors' Disqualification
There has been concern for some time that directors have been striking off companies in order to avoid the scrutiny which is part of the process of winding up a company. In the first three months of 2021 almost 40,000 companies were dissolved, an increase of 743% on the first three months in 2020. As a result of the concerns over abuse of the dissolution process, the government included provisions in the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 for the director's disqualification regime to extended to cover dissolved companies.
The Insolvency Service is now able to investigate the conduct of a director of a company which has been struck off and has not been the subject of any insolvency procedure. This means that where the directors decide to strike off the company rather than place it into liquidation, their conduct can still be investigated. The Insolvency Service can now seek a disqualification order or a disqualification undertaking from a director of a company which has been struck off on the basis of the director's unfit conduct. It can also seek a compensation order against a former director of the dissolved company where the former director has caused loss to creditors.
Comment
The legislative changes have made striking off a company a less attractive option for directors and shareholders. If the company has assets of more than £25,000, the company should be placed into MVL. If the company has assets of less than £25,000 it can be struck off. However, if the company is insolvent and the directors strike it off, they will now be subject to investigation by the Insolvency Service and could face disqualification proceedings and a compensation order for any loss to the creditors.
Whilst the recent change to the dissolution process has been welcomed as closing a loop hole which directors had been using to avoid scrutiny, given that many companies do not file accounts in the period leading up to a voluntary strike off, it is not clear how many dissolved companies will be investigated by the Insolvency Service and how effective the changes to the directors' disqualification regime will be.
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