This article is taken from the third postcard in our series of cards on group reorganisations, and looks at two options when removing unnecessary UK companies from a group.
Striking a company off the register or using a solvent liquidation 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 carry out a solvent liquidation of a company (known as a members’ voluntary liquidation or 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. 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 worth the extra cost involved.
Read the other postcards in this series: