There are many reasons why a company is dissolved, ranging from insolvency to simply having come to the end of its useful life.
Whatever the reason, it is essential that the correct advice is given by the company’s advisers and the correct decisions are taken by the directors. Get it wrong and it could mean the directors/shareholders lose money, incur unlimited fines and might need to restore the company.
This guidance gives some pointers to the good, bad and ugly issues which affect end of life companies.
Basically a company is insolvent when it can’t pay its debts. This usually means that it can’t pay its bills when they become due. It is very important that the directors monitor their company’s solvency and as soon as they realise that they are in this position the essential course of action is to seek advice from a qualified insolvency practitioner. A lack of action by the directors could lead to them personally being liable for some debts of the company. This might involve the allegation of ‘wrongful trading’ which refers to a company that continued to carry on their normal business trading when it was unable to pay its debts as they fell due. Directors must understand that ‘hoping for the best’ and carrying on trading is simply not an option.
Good tax advice is important where the company is solvent and the directors are looking for the most tax efficient way out. There are a number of issues to look at here:
- since 2012, where the assets of the company are below £ 25,000 a pre-dissolution distribution can be treated as a capital gain. Entrepreneurs relief (ER) may also be available
- where the assets are above this figure then the distribution will normally be treated as a dividend with no ER available. This could make the extraction of the final shareholders’ funds far less tax efficient depending on the shareholders’ personal tax situation
- if a liquidator is appointed on behalf of members or creditors, then the distributions made by the liquidator to the shareholders may still be subject to capital gains tax (and possibly benefit from ER) in the hands of the shareholders with no upper limit. Therefore directors will need to undertake some careful tax/operational planning if they are considering winding up the company and distributable reserves are more than £25,000. For instance they may consider reducing distributable reserves in the normal ways while the company is still carrying on business and they may consider having the company purchase its own shares from the shareholders.
Get the legal procedure right
Many accountants are familiar with the strike off application. This might appear to be very straightforward but it’s important that the full legal procedure is observed. There is also some ‘small print’ on the application which needs to be considered.
The law relating to dissolving a company is found in part 31 of the Companies Act 2006. Some of the issues are very important and sometimes overlooked:
1. A company cannot apply for voluntary striking off if it has:
- traded or otherwise carried on business
- changed its name
- engaged in any other activity except one which is necessary for the purpose of:
- making an application for strike off or deciding whether to do so (for example, seeking professional advice on the application or paying the filing fee for the strike off application)
- concluding the affairs of the company, such as settling trading or business debts
- complying with any statutory requirement
- made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business
For example, a company in business to sell apples could not continue selling apples during that three month period but it could sell the truck it once used to deliver the apples or the warehouse where they were stored.
2. An application for voluntary striking off can only be made on the company’s behalf by its directors or a majority of them.
3. A company cannot apply to be struck off if it is the subject, or proposed subject, of:
- any insolvency proceedings such as liquidation, including where a petition has been presented but has not yet been dealt with
- a section 895 scheme (that is a compromise or arrangement between a company and its creditors or members)
The directors may commit an offence if they breach these restrictions and be liable for a fine on conviction.
4. If you are a director you should not resign before applying for strike off as you must be a director at the time the Registrar receives the application.
5. From the date of dissolution, the company’s bank account will be frozen and any credit balance in the account will pass to the Crown. Any assets of a dissolved company will also belong to the Crown and so clearly forward planning is very important to avoid assets being lost.
If they are, the only way of reclaiming them is to have the company restored to the register which can be costly and complicated.
6. When the application is made the directors must make sure that, within seven days of sending the application to the Registrar, all interested parties have been sent a copy. Many companies miss this point and do not comply with the regulations. In a normal situation the parties would be:
- members, usually the shareholders
- creditors, including all existing and likely creditors such as:
- former employees if the company owes them money
- landlords or tenants (for example, where a bond is refundable)
- personal injury claimants
- HMRC and Department of Work and Pensions (DWP)
- managers or trustees of any employee pension fund
- any directors who have not signed the form
The company’s directors must also send a copy of the application to any person who, at any time after the application has been made, becomes a:
- manager or trustee of any employee pension fund
Again the directors may commit an offence if they breach these restrictions and be liable for a fine on conviction.
7. The strike off procedures is generally not quick. If there is no reason to delay, the Registrar will strike the company off the register not less than two months after the date of the notice.
8. If the company changes its mind and no longer wants to be struck off, or if the company becomes ineligible for strike off, the directors must ensure the application is withdrawn immediately by completing the ‘Withdrawal of striking off application by a company’ form DS02
So the directors need to be very mindful of changes to the company once the application has been sent in. Mandatory withdrawal reasons are if the company:
- trades or otherwise carries on business
- changes its name
- for value, disposes of any property or rights except those it needed in order to make or proceed with the application (eg the company may continue with the application if it disposes of a telephone used to deal with enquiries about its application)
- becomes subject to formal insolvency proceedings or makes a section 900 application (a compromise or arrangement between a company and its creditors)
- engages in any other activity, unless it was necessary to:
- make or proceed with a striking off application
- conclude affairs that are outstanding because of the need to make or proceed with an application (such as paying the costs of running office premises while concluding its affairs before disposing of the office)
- comply with a statutory requirement
Offences and penalties
Directors need to be aware that the law provides for various penalties when the above (and other) rules are broken. Common offences to remember are:
- to apply when the company is ineligible for striking-off
- to provide false or misleading information in, or in support of, an application
- not to copy the application to all relevant parties within seven days
- not to withdraw application if the company becomes ineligible.
The penalties for these breaches include potentially unlimited fines.
For more information see:
Thanks to ACCA in practice for the article.