As a matter of company law, companies must maintain their share capital in order to protect creditors. However, share capital can lawfully be returned to members through formal liquidation, approved capital reduction procedure or the purchase or redemption of own shares.
Notwithstanding the strict company law position, it has been relatively common practice for distributions of a company’s share capital to be made to members when a company is dissolved. The problem with this is that any such distribution is unlawful (or ‘unauthorised’) which means that the company remains the beneficial owner of the funds. When a company is dissolved and has remaining assets, these become the property of the Crown under the ‘bona vacantia’ (literally ownerless property) rules. However, in recognition of the fact that it would be unreasonable to expect a company to be formally liquidated where it is economic to do so, the Treasury Solicitor issued Guidelines BVC 17, in which it was stated that, provided certain conditions were met, the Crown would waive its rights under bona vacantia in respect of distributions of under £4,000. The conditions were that:
- The company has been struck off under s652A of CA 1985 or s1003 of CA 2006; and
- The shareholders have taken advantage of Extra Statutory Concession C16 (ESC C16).
ESC C16 is a tax concession which treats the distributions as capital as opposed to income provide certain conditions are met and assurances given to HM Revenue & Customs.
From 14 October 2011, the BVC 17 guidelines are being withdrawn, meaning that the £4,000 protection from bona vacantia applying will no longer be given. The reason for this is that Companies Act 2006 introduced a new easier method for private companies to reduce their share capital from 1 October 2008. That being the case, there should be no reason why companies should not take advantage of this process prior to dissolution.
In reality, as there will be no need for the company to notify the Treasury Solicitor of distributions to be made prior to dissolution, it will probably be unlikely in the majority of cases that the Crown will seek to recover the company’s assets from the members. However, where this will be in point is in the event a creditor seeks to recover amounts from the Crown within 6 years of the company’s dissolution.
However, for companies with more significant assets it will be safer to undertake a capital reduction or formally liquidate companies prior to dissolution. Where there is a real commercial risk of a claim against the company or against the directors personally, the safest route remains a formal liquidation, as a member or creditor may apply to Companies House to have a company reinstated within 6 years of its dissolution.
The tax position for the members on a capital reduction exercise can be quite complex, although the repayment of subscribed share capital is treated as capital. As the distinction between income and capital receipts is important due to the different tax rates and the potential availability of entrepreneurs’ relief on capital returns, it is important to understand how the members will be taxed. It is possible that HMRC may continue to accept such distributions will be covered by ESC C16, and treated as capital. However, ESC C16 itself is due to be replaced by legislation, and its ‘terms and conditions’ are likely to change. Judging by the draft legislation issued on 13 December 2010, this could mean the new terms will be considerably more restrictive.
Therefore, it might make sense to press ahead with planned company dissolutions whilst ESC C16 is still available.
Contact Rosemary Blundell for further information.