Struck Off and Restored
When a company is struck off but is later restored to the Companies Register, what is the legal position for a third party who lawfully terminates its contractual relationship with that company because of the striking off?
In a recent case1, the High Court decided that the termination of the contract after the company was struck off remained effective even though the company was then restored to the Register.
What’s the background?
Two limited companies entered into a contract for the £93 million sale and purchase of two properties. The contract included a clause allowing the seller to terminate it if the buyer was struck of the Companies Register and dissolved. The buyer was a company incorporated specifically for the purpose of entering into the agreement.
The buyer was subsequently struck off and shortly after, the seller served notice terminating the contract. Three weeks later the company made a successful application to be restored to the Register. It was not in issue that the registrar had power to strike the company off the Register or that the striking off was effective at the time – it had been struck off for reasons including a failure to submit its returns in time.
Under section 2018 of the Companies Act 2006, where a company is restored to the Register after it has been struck off, it is then treated as though the striking off never occurred. So it was on that basis that the buyer attempted to claim that the seller’s notice to terminate was ineffective – because it had been restored to the Register.
The High Court rejected this argument. The purpose of the law was that the restoration would undo the ‘direct or automatic effects’ of a striking off and dissolution; to avoid problems that a gap in the existence of the company would cause if there were no such rule.
In this case, the seller served notice to terminate the contract in accordance with what were very clear contractual terms, not as an automatic result of the company being struck off. To hold otherwise, the clause allowing termination on dissolution of the buyer would have been ‘deprived of effect’ and the seller would have been in breach of contract. The court found that the parties could not have intended a restoration to render a third party’s contractual rights ineffective.
Giving judgment, Cockerill J pointed out that the reasons why such a clause may be included in a contract in the first place “may perfectly legitimately include a desire to be able to terminate a contract if it proves to be the case that the contractual counterparty is actually insolvent or … fails to file accounts … This kind of administrative shambles, which is certainly what occurred in this case, is a kind of situation which a contractual counterparty might well regard as a hallmark of an undesirable partner”.
What does this mean?
This depends on the terms of the contract itself. If, as in the above case, the contract includes a clause allowing one party to terminate it in circumstances where the other is struck off the Companies House and/or dissolved, the fact a company is later restored does not invalidate a notice to terminate.
Businesses must, as always, ensure their contractual terms cover all foreseeable eventualities to ensure their interests are protected. Further, the ruling protects the right of one party to terminate the contract if the other party is dissolved or struck off – for good reason. Indeed, Cockerill J pointed out that the clause in this case provides a form of “risk management tool” which parties might want to incorporate in their contracts.
He said it is not draconian for a party to contract for the right to terminate a contract with a company which is in such a state of disarray.
1Bridgehouse (Bradford No 2) v BAE Systems Plc [2019] EWHC 1768
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