"The ability to simplify
means to eliminate the unnecessary so that the necessary may
Simplifying a group structure through closing corporate vehicles can have significant benefits to the balance sheet and the business. It may also help with your work load. This article sets out why corporates should consider simplifying, how they may do so and some of the considerations to bear in mind.
Key motivations for corporate simplification include:
- Remove the "dead wood" from the group
- A company may no longer be required as it may have achieved its purpose;
- There may be duplicate companies which are carrying out the same function as another company within the group;
- The company may have no further use. For example, the business and assets of a company may have been transferred to another company leaving the old company as a shell;
- A return of capital to shareholders (although see below regarding recent tax changes).
- Simplify/streamline the group structure
- To reduce corporate reporting requirements/governance issues;
- Reduce holding costs – such as accounting requirements and management costs;
- Tax considerations – for example tax reporting requirements and tax efficiency;
- To make the group appear more attractive to potential purchasers/investors who will not want to grapple with a complex and inefficient group structure.
- Demerge or partition companies in the group
- To enable property to be split out from a trading company, as a protective measure;
- To enable a business to be divided up if there are differing objectives within an entity.
How to simplify
There are two primary routes to simplifying:
- Members voluntary liquidation; and
- Strike off.
The latter option is much simpler than the former and which route is taken depends entirely upon the circumstances of the group. Each route is set out and compared below along with the considerations that should be borne in mind with each.
Members voluntary liquidation (MVL) – Not all liquidations are bad
What is it?
In a nutshell, a procedure whereby a liquidator is appointed by the shareholders to realise and distribute assets of a solvent company to creditors and then shareholders, following which the company is dissolved.
When can an MVL occur?
A company can only enter into MVL if its creditors will be paid in full and accordingly the directors of the company must be prepared to swear a statutory declaration of solvency prior to the appointment of a liquidator.
The effect of MVL
- On appointment of the liquidator the power of the directors ceases, unless consent is obtained for continuance of those powers.
- Company filing requirements by a director cease upon appointment of the liquidator.
- The liquidator has wide ranging powers when realising and distributing assets of the company. For example in certain circumstances a liquidator can disclaim an onerous lease or other contract. Once the lease, for example, has been disclaimed, this will end the lease and trigger a consequent claim by the landlord. The net value of such a claim can often be less than the initial anticipated surrender value, pre liquidation.
- A corporate group is broken for tax purposes when the company enters MVL.
- In certain circumstances business rates are not required to be paid by a liquidator.
Considerations prior to MVL
The MVL process is usually relatively straightforward. However, some careful planning is required in relation to certain issues prior to the commencement of the process.
- Take tax advice before MVL, as there may be tax implications when a company enters MVL (bearing in mind year ends do not always match up).
- Review the directors' loan account and inter-group creditor position, as upon appointment of the liquidator they may require repayment or waiving (which will have tax implications).
- The directors must establish the true solvency position of the company so that they may complete a statutory declaration of solvency prior to the resolution to enter MVL. Full and accurate disclosure by the directors must be provided to the liquidator, as a mistake regarding solvency can sometimes lead to criminal penalties (and the liquidation becoming an insolvent liquidation and subsequent investigation).
- Companies have in the past been place into liquidation as a means of distributing cash to shareholders in circumstances where capital treatment is available (as opposed to the default position of them being taxed as income). However, the rules have recently changed such that distributions of cash will always be subject to income tax (and capital treatment will not be available) if certain conditions are satisfied, including (in broad terms):
- if the company is a close company (at winding up or two years prior);
- within two years of receiving the distribution the person (shareholder), a connected person or certain partnerships/companies in which the shareholder has an interest carries on a similar trade; and
- one of the main purposes of the liquidation was to obtain a tax advantage.
These rules were designed by HMRC to target "moneyboxing" (keeping a company running and then releasing all the value as a distribution and not income (at a lower tax rate)) and "phoenixing" (moneyboxing more than once with the same business). The new rules are complex and their potential application must be considered carefully in relation to any liquidation.
What is it?
A straightforward procedure and quick process which enables a company to be struck off the Register of Companies and then dissolved. It is mainly aimed towards shell or dormant companies which no longer have any use.
When can strike off occur?
A company can make an application (by its directors) to strike off provided it has not in the last three months:
- traded or otherwise carried on business;
- changed its name;
- made a disposal of property or rights immediately before ceasing to trade;
- engaged in any activity except one which is necessary or expedient for the purpose of striking off/closing the company.
A company cannot be struck off if it is the subject or proposed subject of any insolvency proceedings or a scheme of arrangement.
If a company lies dormant for some time the Register of Companies may dissolve the company itself, although this may not happen for a significant period.
The effect of strike off
- The Registrar will strike off the company from the Register of Companies and the company is then dissolved.
- Any assets held by the company at the date of dissolution will vest in the Crown – known as Bona Vacantia. The liability of a director, officer or shareholder of the company continues.
- The court can still wind up / liquidate a company after it has been struck-off.
- Security over an asset of the company can still generally be enforced.
Considerations prior to strike off
- Identify the assets of the company and transfer them prior to dissolution (ensuring you consider the issue of any value given for the asset transferred).
- Consider how the share capital will be lawfully and tax efficiently distributed.
- Obtain a full tax assessment before dissolution, as there may be issues of taxation which arise when a company is struck off the register – both for the company and the shareholders receiving a distribution.
- If there are contentious issues, the directors will have to deal with these – appointing a liquidator to deal with these issues may be a preferred route.
Corporate simplification can be beneficial and it can allow the business and General Counsel to focus on more productive issues. It just needs some planning with the proposed liquidator – especially regarding tax. If you wish to discuss, please do not hesitate to call and we can introduce you to an appropriate proposed liquidator.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.