Members Voluntary Liquidation V Striking off

We are often asked whether a solvent company that has ceased to trade should be wound up voluntarily by its members or an application be made to strike off.  Both options can provide an efficient means of dissolving a company and returning investment to its shareholders.  When deciding which route to take certain key matters need careful consideration.

Critically, before anything is done the taxation aspects must be carefully considered to ensure that full advantage is taken when timing events.

Members Voluntary Liquidation (“MVL”)

All MVL’s require a declaration from the majority of the directors stating that all creditors will be paid in full together with statutory interest within a period not exceeding twelve months of the winding up.  If the company fails to settle its liabilities within the prescribed time then any director making such a declaration without having reasonable grounds in forming that opinion is liable to imprisonment and/or a fine. It is critical therefore that directors take proper advice and give full consideration to the company’s position prior to making such a declaration.

As the services of a Licensed Insolvency Practitioner are required for a liquidation, for smaller companies, especially dormant ones, it may not always be the most cost efficient method of dissolution.  It does however have some important attributes to protect the directors once the Liquidator has distributed the assets. Some points worthy of note are listed below:

• It is a very quick method to dissolve a company.  In certain circumstances the shareholders may receive a distribution immediately upon the commencement of liquidation.

• The timing is under the shareholders control and therefore full advantage can be taken for tax planning purposes.  Consideration should be given by shareholders to the company making income distributions prior to liquidation to optimise the effect of tax allowances on the capital distributions made following liquidation.  Anti-avoidance provisions may need to be addressed.
• The directors can generally relinquish responsibility for the company and any distributions and allow a Liquidator to deal with all the formalities to dissolution.

• The basis of costs may be agreed prior to the commencement of the liquidation.

• Distributions in specie to shareholders can be made, avoiding the need, and cost, of the liquidator selling all of the assets.  Typical examples may include motor cars and properties.

• All of the reserves (including the share capital) can be distributed to the shareholders in contrast with a striking off where generally the share capital passes to the Crown as Bona Vacantia (“ownerless goods”), subject to the concessions described below.
• Following certain formalities, once the liquidator distributes assets the distribution cannot be subsequently upset by a claimant.  Such claims may arise, for example, where an industrial injury claim is made some years after the company ceased trading or where the company had historically assigned a lease and at a future date the assignee defaults on the terms of the lease leading to a claim by the landlord.

Striking Off

Application for striking off is made to the Register of Companies under the provisions of the Companies Act 2006.  It can be a very cost effective method of dealing with dormant companies with no assets or liabilities (including contingent liabilities).  Points to note are listed below:

• Ensure there is no further purpose of the company prior to dissolution (if only say to protect the name) as if the company needs to be resurrected following dissolution it could provide expensive.
• Ensure that the company does not have any assets or liabilities whether actual or contingent.  On dissolution all remaining property or rights become bona vacantia with ownership passing to the Crown.
• A company cannot normally make a distribution except out of profits available for distribution and therefore cannot distribute its share capital when it is struck off.  For companies with substantial share capital a formal liquidation may therefore need to be considered.  In 2006 the Treasury confirmed that in cases where a company had been struck off, and where the shareholders had taken advantage of extra-statutory concession C16 (effectively, for tax purposes, distribution of revenue reserves are treated as capital distributions), and where the distribution of share capital in question was less than £4,000 then, as a concession the Crown agreed to waive its rights to any funds distributed to the former members.

• This extra statutory concession has recently been enacted into law and a limit of £25,000 has been imposed on the total amount that can be distributed as capital, rather than income, for tax purposes.

• Taxation aspects must be agreed with H M Revenue & Customs.  Consideration should also be given to taper relief issues and also tax arising on the waiver of inter-company debts.

Comments

When considering the dissolution of a solvent company it is worthwhile seeking professional advice as to the best course of action.  This bulletin is not intended to be relied upon as a definitive statement of the law and professional advice should always be sought on any specific issues.

The professional costs can be substantially reduced if the directors or professional advisors deal with realising assets, paying creditors and agreeing the taxation aspects prior to a Liquidation.  By careful planning and liaison, it is possible to minimise the liquidation costs dramatically and achieve a tax efficient exit to a company which is of paramount importance to clients.

Tax Implications

Clients considering liquidation or strike off should take advice on the tax implications if doing so.  In normal circumstances a distribution of assets by a company to a shareholder is an income distribution for tax purposes, in the same way as a dividend, except to the extent that it represents a repayment of share capital.  However, a distribution to shareholders in a winding up is not a distribution for tax purposes, but is a capital receipt taken into account when calculating any chargeable gains or losses on the deemed disposal of the shares.

The same tax treatment applies where the company has made or intends to make, on application to be struck off, and makes a distribution in respect of share capital in anticipation of being dissolved, provided:

• At the time of the distribution the company intends to secure, or has secured, the payment of any sums due to it;

• At the time it intends to satisfy, or has satisfied, any debts or liabilities owned by it; and

• The amount of the total distributions does not exceed £25,000.  This cap applies only to a distribution of profits.  A repayment of share capital will be a capital receipt in any event.

How can KRECR help?

If your client has dormant companies then we will review, free of charge, each one and recommend whether it should be subject to a Members Voluntary Liquidation or striking off.  Where we recommend strike off we will either undertake the process for a fixed fee of £500 or provide your client with the necessary forms and checklist so that they can undertake the procedure themselves.

Where we recommend Members Voluntary Liquidation we will provide a fixed fee quote to undertake the process with no obligation on the client.

What will KRECR not do?

We do not provide the client with tax advice; this is left to the clients advisers.  If appropriate we could recommend tax advisers to the client; however this is usually provided by the company’s own advisers.