New Treasury approach means striking off could be costly
11/1/2008
Company directors and professional advisers who use 'informal' winding-up procedures to avoid the cost of a solvent liquidation could be acting illegally - and face unexpected penalties.
These unofficial arrangements have traditionally gone unchallenged, but the risks for advisers and shareholders appear to be increasing due to a change in policy by the Treasury Solicitor.
As a result, Paul Masters, an insolvency specialist at corporate recovery firm Leonard Curtis, is advising people to consider formal solvent winding-up procedures, even where relatively small sums of money are involved.
"Where a company has ceased trading, paid all its creditors, distributed its reserves and just has cash in the balance sheet, it is common practice - with the company accountant's blessing, and clearance from HM Revenue & Customs - to pay the cash to the shareholders," explained Paul Masters.
"HM Revenue & Customs has traditionally regarded this though it was a distribution in a winding-up and the company has then been struck off the register at Companies House. This ignores two fundamental legal issues. Firstly, under the Companies Acts, to make such a distribution requires that the company has distributable reserves, which it will often not have. This will be an illegal dividend, the practical effect of which will be to simply to create a debt due to the Company by its shareholders. Secondly, when a company is struck off, its remaining assets transfer to the Crown."
This means that as such payment of cash to shareholders creates a loan due to the company, when it is struck off, this debt can be collected by the Crown. The Treasury Solicitor can then demand repayment of the debt from the shareholders.
Paul Masters continued: "Historically, this does not appear to have happened, but the situation has changed and the Treasury Solicitor has recently updated its guidelines. Now, where such an illegal distribution of capital is made , the Treasury Solicitor may demand repayment of the debt from the shareholders.
"If the sum is relatively modest, say £3,000, the distribution will probably be overlooked. But the Treasury Solicitor could take a very different view if the amount is £30,000, or £100,000."
If there are substantial sums involved and the Treasury Solicitor does make a claim, it may be possible to have the company restored to the Register and then appoint a members' voluntary liquidator who can distribute the debt 'in specie' to the shareholders. However, this is time consuming and can be costly to shareholders and could be damaging to an accountant's professional reputation.
Paul Masters added: "Where even relatively small sums are involved, the best advice is often to carry out a relatively simple and inexpensive solvent liquidation, which will eliminate all the risks for both shareholders and financial advisers."
