Removing dormant companies from your group: what potential problems should you be aware of?

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.

To receive your free copy of the guide in full, click here.

As with any project, problems and blockages can arise. It is not unusual for legal entity project to be delayed or even to be abandoned because of unexpected issues.

It is helpful to be aware of the typical causes of problems, so that they can be anticipated and addressed. Here are some of the more common ones which other large corporates have encountered.

1. Lack of accountable project resource – the time and focus which is required for this kind of project is often under-estimated. Without dedicated resource, it can be difficult to make consistent progress.

2. Staff are too busy to reply to information requests – before any given companies are removed, information requests are usually sent out to various people internally and externally, as part of the due diligence process. This places demands on respondents’ time, in addition to their ‘day job’, and it is easy for the project to be delayed if responses are not produced promptly.

3. Staff attachment to sub-brands / product brands – in some larger organisations, particular brands used within the group can have a strong emotional attachment for some members of staff. There can be a resistance to removing legal entities which are associated with a particular brand, even if there are no plans to discontinue the use of that brand.

4. Staff who knew about the relevant companies have left – this is a key component of the ‘corporate memory’ issue which can make it more difficult to gather information about the status of particular legal entities which are to be removed. Chapter 4 contains a fuller discussion of this issue.

5. Confidential projects – it can happen that companies which are within the scope of a legal entity reduction project are also the subject of other, confidential, projects within the organisation. The legal entity reduction project team may not be aware of that other project. This can result in time being wasted on due diligence, planning and even implementation work, only for the company to be taken out of scope at a late stage.

6. Lack of high level support – corporate simplification projects can sometimes be regarded as purely administrative tasks which do not warrant senior, director-level involvement. This is a mistake, because high level support is critical in order to be able to escalate issues and deal with blockages as they arise.

7. Concerns about job security – in some cases, there can be misconceptions about the purpose of the legal entity reduction project. For example, there may be a perception that the project is designed to produce cost savings through redundancies, which may not be the case. This can mean that staff members are reluctant to assist with the project. Clear communication of the reasons for and objectives of the project is important to avoid this.

8. Well-meant but rogue ‘recollections’ – this issue is very common, but difficult to address. Members of the project team or respondents in the due diligence process may have a recollection or belief that a particular company is affected by a certain issue due to its historic activities. This may give rise to significant time and resource being spent on investigating that issue, with no tangible result.

9. Unfocussed due diligence, throwing up too many unresolved questions – if no clear materiality threshold is set for the project, it is easy for the due diligence process to get bogged down in a mass of questions and apparent issues.

10. Project fatigue – for more complex organisations with many legal entities, a corporate simplification project may continue for a number of months, if not years. Unless the project team is properly supported and the continuing importance of the project is communicated, the project can grind to a halt.