Solvent Liquidation / Restructuring
When we use the term “corporate” this will usually apply to a limited company, but in most instances described below, it will also apply to a partnership or a limited liability partnership (LLP). If you are a sole trader or an individual please see the personal information pages.
“We always strive to maximise the return to a company’s stakeholders”
A company may be solvent, i.e. it can pay all its liabilities in full, and simply needs closing down in the best possible way. By closing the company, cash and assets can be extracted in the most efficient way for its stakeholders (usually the shareholders). Distribution of these by a Liquidator can often lead to huge tax savings in respect of an individual shareholder’s own tax liabilities.
Sometimes companies within a Group have reached the end of their lives, or have remained dormant for a number of years and are taking up time and cost to administer them on an ongoing basis. Again, a Liquidator may be able to utilise previously unused tax losses to benefit the Group, or simply provide assistance in putting them to bed properly.
The structure of a Group may also need reorganising to reduce the risk between businesses, or to make it more efficient.
A company may just have come to the end of its life and simply needs striking off from the Register of Companies. Whilst this may sound simple, there are a number of pitfalls that could present themselves and we will be happy to advise on these.
“Liquidation” is simply the formal process for selling assets and paying liabilities and concludes the affairs of a company to allow it to cease.
It is therefore equally applicable to a company that is solvent, i.e. it can pay all its liabilities. A solvent liquidation is known as a Members Voluntary Liquidation (“MVL”). Whilst the processes are similar, an MVL should not be confused with a Creditors Voluntary Liquidation (“CVL”) as creditors have no involvement in an MVL as they will be paid in full.
The Members (another name for shareholders) swear a Statutory Declaration of Solvency to confirm the solvency of the company and then appoint a Liquidator. The Liquidator’s job is to realise any assets, pay creditors in full (together with statutory interest if applicable) and then distribute any surplus funds including capital to the shareholders.
An MVL is particularly useful:
- If the amount of capital to be distributed is greater than £4,000: there is no risk that capital distributions can be clawed back from shareholders;
- A significant value of assets or cash is being distributed to shareholders – distribution by a Liquidator allows for additional tax planning to minimise personal tax liabilities for the shareholders;
- Liabilities are finalised to the extent that all claims against the company are dealt with in one go; and
- The company cannot be restored to the Register of Companies if more than 2 years have elapsed since its dissolution (except in rare circumstances for fraud or other criminal related matters).
A company will sometimes come to the end of its life through a natural course of events, e.g. it was incorporated for one specific purpose and that purpose has been achieved or it has completely ceased trading and everyone has been paid. Concluding the affairs of the company is then as simple as making one application to the Registrar of Companies to dissolve and strike off the company.
The process if very simple and involves filing a form with the Registrar of Companies and three months later it is dissolved! The process is particularly useful for finalising the affairs of dormant companies, distributing capital of less than £4,000, reducing personal tax liabilities for shareholders on distributions or where directors/shareholders simply want the comfort of a formal procedure to close everything off.
However, there are some downsides:
- Any assets (including capital) remaining in the company at the date of dissolution become bona vacantia. This means that the shareholders no longer have a right to them and instead they become the property of the Treasury Solicitor;
- If capital in excess of £4,000 was distributed to shareholders other than by a distribution by a Liquidator, this sum can be clawed back from the shareholders by the Treasury Solicitor.
- The company can be restored back to the Register at any time in the 20 years following dissolution (compare this to a 2 year time limit for restoration if a liquidation process preceded dissolution).
- Improper application for striking off can result in a fine of £5,000, up to seven years imprisonment and disqualification from acting as a director for up to 15 years!!
Given the seriousness of the last point above, it is advisable to take specific advice on whether it is appropriate to simply strike the company off or whether a liquidation process would be better.