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Should you tidy up your corporate group?

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05/02/2014

Public companies and large private companies that have been incorporated a number of years are likely to have accumulated a number of subsidiaries, some of which will be defunct. In other cases, the subsidiaries may not be actively trading but may have historic liabilities, actual or contingent. In both cases, it may make sense to get rid of these unwanted subsidiaries. What are the alternatives?

Defunct subsidiaries

Defunct companies may have come into being following an acquisition or group reorganisation, or where a proposed transaction, for which new companies have been incorporated, does not complete. Alternatively, a new company may have been incorporated as a vehicle for marketing a new product, which does not then come to fruition.

These defunct companies may persist simply because no-one within the group has responsibility for them – the administrative burden is spread across different departments with the consequence that no one person appreciates the overall cost of their maintenance. The costs of maintaining these subsidiaries can be significant – in wasted management and company secretarial time and audit fees. There are other reasons, unrelated to costs savings, why it can be beneficial to rationalise dormant subsidiaries, including:

  • the Registrar of Companies has power to strike defunct companies off the register if he considers he has not received documents from the company that he should have, or mail that has been sent to the company has been returned undelivered. If, following enquiry, he is satisfied that the company is no longer operating, he will publish a notice in the London Gazette of his intention to strike the company off. There may be a stigma attached to this
  • the corporate structure may need to be simplified in order to release capital tied up in the business
  • shareholders may be uneasy where there are a large number of dormant companies within the group.

The voluntary striking off procedure

A company that is not trading may apply under section 1003 of the Companies Act 2006 to be struck off the register. It may do so if in the previous three months it has not:

  • changed its name
  • traded or otherwise carried on business
  • for value, disposed of property or rights that, immediately before it ceased to be in business or trade, it held for disposal or gain in the normal course of its business or trade
  • engaged in any other activity except one necessary or expedient for making the application, settling the company’s affairs or meeting a statutory requirement.

A notice will be published in the London Gazette and a three-month period will follow during which objectors can come forward. Copies of the application must be given to, among others, members, directors, employees and creditors of the company. On the expiry of such period, another notice will be published stating that the company has been struck off and dissolved.

An application to strike off is usually only appropriate where the company has no assets or liabilities. Once dissolved, the company’s assets are deemed to be bona vacantia and vest in the Crown. Where the company has liabilities, then it is possible that a creditor will object to the application. Creditors include contingent and prospective creditors. An objection by a creditor will not necessarily succeed – the Registrar has a discretion whether or not to proceed with the striking off – but at the very least it will disrupt the striking off process.

Due diligence

Due diligence should be taken before a striking off application is made and not only to ensure that assets are not inadvertently lost to the Crown. Consider, for example, whether dissolution will impact on the group’s tax affairs; whether there are any outstanding contracts to which the company is party, or whether the company has any debtors; whether the company is the proprietor of any intellectual property, whether dissolution may trigger a default provision in banking documents, or whether a share capital reduction could usefully be made.

It is possible for a company that has been dissolved following a voluntary striking off to be restored to the Register under sections 1029 to 1032 of the Companies Act 2006. Restoration will deem the company to have continued in existence for the entire period of the dissolution – so that, if there are any liabilities, the apparent benefit in having struck off the company will be lost. In such circumstances, consideration might be given to a members’ voluntary winding up.

Getting rid of the liabilities? Members’ voluntary winding up

The purpose of a voluntary winding up is to wind up a company without the involvement of the court. There are two types of voluntary winding up: members’ voluntary winding up and creditors’ voluntary winding up. Neither involves the court and both are commenced by a voluntary resolution of the company to wind itself up. The distinction between the two depends upon whether or not the directors are prepared to give a statutory declaration as to solvency in accordance with section 89(1) of the Insolvency Act 1986 – i.e. that the directors, having made full inquiry into the company’s affairs, 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. Where such declaration is given, the winding up is a members’ voluntary winding up.

A major benefit of the members’ voluntary winding up procedure was seen in the recent case of Re Danka Business Systems Plc (in Liquidation) [1]. In this case, Danka had given tax indemnities to Ricoh, when Ricoh acquired a group of companies from Danka. Danka subsequently went into members’ voluntary winding up. The liquidators valued Danka’s contingent claim – it was not due to crystallise, if at all, for another year – at €268, 961. Ricoh claimed that the total liability under the tax indemnity was €11,886,695. The liquidators proposed to distribute Danka’s assets to the creditors, using their estimated value of Ricoh’s claim. Ricoh applied for a court order directing the liquidators to retain a fund of €11,886,695 to meet the tax liability. It argued that if the liquidators distributed assets without creating a reserve fund it would be effectively compromising Danka’s liability under the tax indemnity.

The Court of Appeal dismissed Ricoh’s arguments, ruling that the liquidators had proceeded in accordance with the statutory regime, by valuing the contingent claim on the basis of a genuine assessment of the chances of the liability occurring. The liquidators were not obliged to delay the liquidation pending crystallisation of contingent claims or to ring-fence any sums that might be due to a creditor with a contingent claim.

The Danka decision therefore confirms that a members’ voluntary winding up may, in certain circumstances, compromise a claim against the company. The procedure provides finality (albeit at a cost to the contingent creditor). The risk, from the company’s point of view, would be of a court challenge by the contingent creditor over the liquidator’s valuation of its claim.

If you are considering tidying up your group structure and would like to discuss your options, including voluntary striking off and members’ voluntary winding up, please contact the authors or your usual Walker Morris contact.

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[1] [2013] EWCA Civ 92

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