What Happens to Directors When a Company Is Struck Off?
When a company is struck off – either voluntarily or forcibly – there are a range of potential legal and financial consequences for directors.
You may find yourself having to personally repay company debts, or losing your assets to the Crown.
In this guide, we’ll be explaining how directors may be affected by a company strike-off and how you can best protect your interests.
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What’s the Difference Between Company Strike-Off and Liquidation?
Company strike-offs and liquidations both result in the formal closure of a company. However, there are some differences to keep in mind.
A company strike-off – whether voluntary or compulsory – simply means the removal of a company from the Companies House register. The business is “struck off” its records, ceasing its existence as a legal entity.
Liquidation, on the other hand, involves selling the company’s assets to return funds to either the company’s creditors or its shareholders. The company is then closed.
The key difference is the handling of company assets. The company strike-off process does not concern itself with the handling of assets – or a director’s duty to creditors – which can have various legal and financial consequences.
However, liquidation ensures that all assets are properly disposed of and affairs are properly resolved.
Why Should Directors Avoid Having Their Company Struck Off?
Voluntary and compulsory strike-offs can effectively close down a company that is no longer needed.
However, this is not always the case.
Strike-off is only appropriate for solvent small businesses with assets below £25,000. Businesses with assets above this should pursue a Members’ Voluntary Liquidation as it is much more tax-effective.
Insolvent businesses must not pursue company strike-offs. Doing so can have major legal and financial consequences for company directors. Insolvent businesses need to get a Creditors’ Voluntary Liquidation instead.
What Are the Potential Consequences for Directors?
Company Assets Can Be Assumed By the Crown
When your company is struck off, it ceases to exist as a legal entity.
This means that all assets belonging to the company are left without a legal owner. These are known as “bona vacantia”, meaning “vacant goods”. In the UK, all vacant goods are assumed by the Crown.
If you don’t handle your assets correctly before the company is struck off, you risk losing your hard-earned property.
You Could Be Charged with Misfeasance
Once a company becomes insolvent, a director’s legal duty changes. They must place the interests of creditors first, rather than the interests of the company and its shareholders. This means they must protect the position of their creditors and do their best to repay them in full.
A Creditors’ Voluntary Liquidation ensures this duty is met by stopping the company from trading and selling its assets to repay creditors.
However, some directors have their companies struck off in an effort to avoid repaying creditors. If the company is then restored by creditors – so that they can force it into liquidation – an investigation will be held into the director’s conduct.
This will likely result in misfeasance charges. Directors found liable may be:
- Forced to personally repay company debts
- Hit with large fines
- Disqualified from acting again as a director for 2-15 years
Reputation Could Be Damaged
If a company is struck off, it will cease to exist as a legal entity, ending all of its existing contracts.
If this happens, customers and clients may doubt your management abilities. If you were to try to restore your business, they may be sceptical about renewing a new contract with you going forward.
Directors Will Not Be Able to Claim Redundancy
However, in a Creditors’ Voluntary Liquidation, some directors may be able to claim redundancy. You’ll need to show that you’re an employee of the company and work for at least 16 hours a week. The amount you can receive depends on your age, length of service, and the size of your salary.
The average redundancy package directors receive is £12,000.
How Can Directors Protect their Interests?
When closing a company, the best way to protect your interests is to talk to an insolvency practitioner.
There are a range of different options, each tailored to specific circumstances.
Closing a Solvent Business
A Members’ Voluntary Liquidation is the strongest closure option for solvent businesses.
The business is closed, and its assets are sold before their value is returned to shareholders at a highly preferential tax rate.
Returns under an MVL are subject to Capital Gains Tax rather than full Income Tax. This means only the profit on the sale of an asset can be subject to taxation. For example, if you sold an asset worth £5000 for £5500, only the £500 could be taxed.
You may also be able to qualify for Business Asset Disposal Relief, which halves the rate of Capital Gains Tax from 20% to just 10%.
Closing an Insolvent Business
A Creditors’ Voluntary Liquidation provides directors with a safe exit from the business.
A liquidator assumes control of the company, stopping it from trading and selling its assets for the benefit of creditors. Any debts remaining after the liquidation are written off.
This ensures that a director fulfils his legal duties to creditors, meaning you’ll still be able to run another company in the future, and you won’t have to personally repay company debts.
Saving an Insolvent Business
You may only be contemplating company closure – whether a strike-off or liquidation – because you feel there’s no other choice.
However, this isn’t actually the case. Companies can be returned to the point of solvency if action is taken early enough.
A Company Voluntary Arrangement allows you to make one singular monthly repayment, which is then divided up between your creditors. It’s a repayment contract which protects your company from closure. You’ll need the backing of your creditors to pursue it, but your insolvency practitioner will work with you to make a solid proposal.
You can also pursue administration. This doesn’t offer the same guarantees as a CVA, but it doesn’t require the support of your creditors. Some companies use administration to make their company stable enough to enter a CVA.
Speak to an Expert
If you’re considering closing your company, it’s important that you speak to an insolvency practitioner.
Our team are experts in company closure and can guide you towards the best way to protect your legal and financial interests, no matter what your situation.
Get in touch to book a free consultation today.
