Insolvency, Strike-Off & Administrative Restoration
The biggest liability facing any company is that of insolvency, where the responsibilities change from being owed to the company to those set out in the Insolvency Act 1986 (and related statutes), designed to protect the company’s creditors. The penalties that can be imposed upon a Director are those of personal liability and subsequent disqualification.
If a company starts to get into difficulties it needs to check whether it still is able to comply with the solvency test. In order for the test to be satisfied, it must be able to pay its debts as they become due in the normal course of business and its assets value must be greater than the value of its liabilities (including contingent liabilities).
If a company cannot continue to operate then it will either go into liquidation or receivership.
When a freehold-owning company has been dissolved, or an individual freeholder becomes bankrupt, reversion of property to the state in the absence of legal heirs or claimants (escheat) can still occur in England and Wales.
This usually means that all the property held is ‘vested in’ (transferred to) the Official Receiver or Trustee in Bankruptcy. Leaseholders can serve on either parties a Notice of compulsory acquisition and because they are both acting as landlord for the time being, both are equally bound by s85 of the Leasehold Reform, Housing & Urban Development Act 1993 to respond, by serving a Counter-Notice.
However, the Receiver/Trustee can refuse to accept that property by disclaiming it which affects a few hundred properties a year. This is where freehold property, (such as the common parts of a block of flats) would ordinarily pass to the trustee for them to realise in order to pay the bankrupt’s debt. If the property is split into leased flats, (which gives a freeholder an obligation to spend money), the bankruptcy means not only is the property no longer theirs but the disclaimer destroys the freehold estate as well so that the land ceases to be owned by anyone! It therefore becomes land held by the Crown ‘in demesne’ (of an estate) occupied by the owner, not by tenants.
If the property is likely to be of any use to the Crown, it can ‘complete’ the escheat, by taking steps to exert rights as owner. If it does not, the land is effectively in limbo.
The leaseholders of the flats however, or their mortgagees (mortgage providers) can exercise the rights given them by the Insolvency Act 1986 to have the freehold property transferred to them. This is the main difference between escheat and bona vacantia.
The Treasury Solicitor will usually sell the freehold to the leaseholders at open market value or less. This must be done by negotiation and there is neither the need (or the legal ability) to serve the Initial Notice. The proceeds of sale will then be transferred to the Exchequer to be dealt with in the same way as money raised by general taxation.
Where the leaseholders are directors and/or shareholders of a company which owns the freehold through a company which has been dissolved, the freehold may be acquired under the rules of administrative restoration.
The procedure involves 3 key conditions that must be met if the Registrar is to consider the application:
- The Registrar must be satisfied that the company was carrying on business or in operation at the time of its striking off (see below) which would be made obvious by the fact that at the time of being struck off the Register, the company’s main asset was the freehold. An up to date office copy entry of the freehold will serve as evidence to satisfy this condition;
- If any property previously vested in the company has vested ‘bona vacantia’, the Treasury Solicitor representative must signify to the Registrar in writing, consent to the company’s restoration. This is called a ‘Bona Vacantia Waiver Letter.’ The Treasury Solicitor’s current fee for applying for such consent is £79.00.
- The final condition is that the leaseholders will need to provide to the Registrar such documents as are necessary to bring up to date the records kept by the Registrar and pay all penalties outstanding at the date of striking off.
Note: Only a former Director or former member of the company at the time the company was dissolved, can apply.
The Registrar of Companies has power under Part 31 Chapter 1 s1000 of the Companies Act 2006 to strike a company off the Companies Register if he/she has reasonable cause to believe that a company is not carrying on business or is in operation because accounts and returns have not been received on time or there has been a change of the registered office address.
If a company doesn’t have the assets to justify a formal liquidation, the company Directors can simply make an application for voluntary strike off (also known as voluntary dissolution). Dissolution removes the need for filing annual returns and accounts.
This the simplest and least expensive method of closing a company down, avoiding as it does the cost of liquidation, fees and expenses. It also avoids formal investigation into the conduct of the directors which is required in liquidation or receivership.
It is of the utmost importance that directors check with the main stakeholders of the company, such as its creditors, employees or investors if they want to have the company struck off the Register.
The correct procedure to dissolve a company is to complete and return Form 652a to Companies House along with a small fee.
Copies of the form asking for dissolution must be given to the following groups within 10 days of the application being submitted:
- Creditors; (given 3 months to consider the request to dissolve the company and can reject such a request if they believe fraud may have occurred). In this instance the company will either be liquidated voluntarily or compulsorily.
- Managers or Trustees;
- Directors (who have not signed the form).
Clearance must be obtained from the Inland Revenue before the company is struck off and it can only be dissolved if the following conditions apply:
- The company has not traded for 3 months; this must be a genuine cessation of trade;
- The company has no assets, property or cash at any bank.
- The creditors must be circulated requesting their permission for the company to be dissolved under this process. Creditors are given 3 months to consider the request to dissolve the company and can reject such a request.
- The company cannot change its name during this three-month period.
- The company may not have disposed of any property or assets (this may include land and buildings, plant and equipment, debtors and other assets).
On receiving the application, the Registrar will write formally to the company’s registered office (default notices) advising of the intent to strike the company off and inviting objections to the proposed striking off in the London Gazette. A copy notice is placed on the company’s public record.
The Registrar will strike the company off the register not less than 3 months after the date of this notice is she sees no reason to do otherwise and the application has not been withdrawn.
- A notice of intent is then published in the London Gazette which is the official newspaper of record containing various statutory notices and advertisements and which is published daily.
- If no reply is received within a specified time limit a notice stating that at the expiration of 3 months (unless cause is shown to the contrary) the name of the company will be struck off the Companies House Register if the Registrar sees no reason to do otherwise and the application has not been withdrawn. This notice is published in the London Gazette;
- The company will be dissolved on publication of a further notice stating this in the Gazette.
Note: At the time of striking off, a letter will be issued to the contact name on Form 652a confirming the proposed date of dissolution.
If the company to be dissolved owns property then leaseholders must be informed.