Removing dormant companies from a group: will we need to appoint liquidators?

This article contains an extract from our Free Guide to Removing Dormant Companies, which is written for Group FDs, CFOs, In-house Tax Professionals and Company Secretaries.

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There are two main ways to remove a UK company: a Members’ Voluntary Liquidation (MVL), or a strike off.

(Actually there are two other options, which are creditors’ voluntary liquidation (CVL) or a cross-border merger using the European Directive. A CVL would imply that there are third party creditors which will not be satisfied in full, and therefore has reputational issues for the group concerned. Cross-border mergers are possible, and are relatively expensive but are sometimes used – see Chapter 8 for more information.)

MVL vs Strike Off: an overview

In short: using an MVL is generally more expensive and slower, but gives the group (and directors in particular) the additional comfort that the liquidator will follow a statutory process for advertising for creditors, realising assets and making distributions to shareholders. An MVL also provides an important tool when dealing with contingent liabilities and onerous assets.

A strike off is simpler, and involves simply sending a form to Companies House, and notifying certain third parties.

Both these legal mechanisms represent the last phase of the process. Leading up to that, appropriate due diligence investigations would have been carried out, and any assets, liabilities or obligations would usually have been cleared out of the company.

Directors’ perspective: risk issues

Striking a company off the register and using a solvent liquidation (MVL) both involve a certain amount of legal risk for the directors of the company concerned. Aside from tax considerations, the decision about which to use is usually a matter of balancing risk against cost.

To initiate an MVL, a majority of the company’s directors must sign a declaration to the effect that, having made a full inquiry into the company’s affairs, they are satisfied that the company will be able to pay its debts in full, together with any interest, within a specified period not exceeding 12 months from the commencement of the winding up.

When striking a company off the register, no declaration of solvency is required. However, the application must be signed by a majority of directors, and the directors have a duty to notify any creditors and employees (as well as members and any other directors). The directors may commit an offence if they fail to make the necessary notifications and they cannot show that they have taken all reasonable steps to comply with the duty. This implies a duty to take all reasonable steps to identify possible creditors, amongst others.

For both procedures, the directors will therefore want assurance that an appropriate level of due diligence has been carried out to identify material assets and liabilities. (See Chapter 7 for more information on this.) However, by using an MVL, directors get the added reassurance of knowing that the liquidator will follow a statutory procedure of advertising for creditors before completing the liquidation. This is often considered to be worth the extra cost involved.

Limitation periods for restoring companies to the register

It can happen that a company needs to be restored to the register after it has been struck off or dissolved as the final process of a liquidation. For example, you may discover that the company holds assets which had not been identified before removal. (See Chapter 6 for what can be done to avoid this situation arising in the first place, and Chapter 9 for an overview of the process for restoring UK companies to the register.) The limitation period is 6 years from the date of dissolution, whether the company was removed by strike off or by liquidation (except in the case of a personal injury claim, where there is no limitation period).

Project-level considerations

If your project concerns a significant number of companies, then you will probably want to develop a standardized approach. Because of the economies of scale involved, the unit cost of each MVL is likely to reduce, so that the cost benefit of strike off as opposed to MVL will also correspondingly reduce.

For this reason, large corporates sometimes make a policy decision to put all the relevant companies into liquidation – it’s one less decision to be made, and the directors get the additional comfort that the liquidators will follow a statutory process to deal with creditors.

Company-level considerations

Wherever possible, assets and liabilities will usually be stripped out of each company concerned, so that it is left only with cash, intra-group debtors and intra-group creditors before the process of MVL or strike off is begun. Sometimes that clean-up will require the creation of reserves (for example, by reducing the company’s capital using the solvency statement procedure), so that a distribution in cash or in kind can be made, or assets can be sold at book value rather than market value. From a director’s perspective, the content of that solvency statement is almost identical to the declaration of solvency required for an MVL.

If the project team has not made the decision to use an MVL for all the companies within the scope of the legal entity reduction project, then often the default option is to use a strike off, since it is generally quicker and cheaper. For any given company within the scope of the project, the question is therefore whether there are special circumstances which would indicate that an MVL is more appropriate. Those special circumstances may include:

• Material contingent liabilities – such as environmental liabilities or possible product liability claims
• Onerous assets or contracts, such as leases of real estate or equipment rental contracts. (A liquidator has the power to ‘disclaim’ onerous assets.)
• Uncertainty about the existence or nature of creditors
• The need to take corporate action in order to return assets to shareholders. For example, the company may have material net assets which are not matched by distributable reserves. In that case, using an MVL may be considered as an alternative to a capital reduction followed by a distribution and strike off.