Another blow to ESC C16

Informal winding-up made more difficult

(revised 7 February 2012)

When solvent companies have ceased trading, they often want to distribute their assets without the expense of a formal members’ voluntary winding-up. HRMC’s concession C16 [1] allows companies to be struck off the register under the Companies Act [2] without a formal winding-up, whilst treating the distribution of assets as a distribution in a winding-up (taxed as a capital gain) rather than a taxable dividend.

But when the concession is put on a statutory footing it is to be limited to distributions not exceeding £25,000. The policy justification for this is not clear (vague references to "abuse"), but it means far more solvent liquidations and more fees for insolvency practitioners. And previously (when this article was published in its origianl form) the Treasury Solicitor’s office announced that it has withdrawn its BVC17 guidelines. The guidelines said that the Crown would not seek to recover share capital distributed to shareholders before a company's dissolution if the company has been struck off, the shareholders had taken advantage of HMRC's extra-statutory concession C16, and the amount of the distribution was £4,000 or less.

Returning the share capital, share premium account or capital redemption reserve to shareholders is an unlawful reduction of capital for company law purposes, and the company has the right to recover it. When the company is struck off, its property, including the right of recovery, vests in the Crown (or the Duchy of Cornwall or Duchy of Lancaster) as bona vacantia [3]. The Crown does not routinely pursue all these cases, but the risk is there, and it makes it difficult for professionals to recommend this route.

Under the BVC17 guidelines, it was safe to proceed if the amount involved was less than £4,000. The fact that the guidelines are being withdrawn suggests that some cases involving less than that amount may be pursued in future.

The justification given given was that the Companies Act 2006 procedure for reduction of capital out of court can be used instead. That is true: the new reduction procedure is extremely flexible and useful, but it does involve some documents and professional costs. It needs both a special resolution and a declaration of solvency by the directors. I have done many reductions of capital under the old and new procedures, and the new ones are far easier and cheaper, but there is still a cost involved. This is more cost and formality for small businesses, at a time when the Government is supposed to be reducing it.

There had already been some speculation that the usefulness of ESC C16 was ending [4], and this two changes are further nails in the coffin. Perhaps IP’s and accountants advising on striking off businesses under C16 should equip themselves with a set of legal documents to carry out reductions of capital without a large increase in costs; but those exceeding £25,000 of distributable assets will need to be done by way of formal winding-up, once the current draft Order comes into force.

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[1] http://www.hmrc.gov.uk/specialist/esc.pdf at page 62, likely to be replaced by legislation following a recent consultation

[2] Companies Act 2006 sections 1000 et seq

[3] Section 1012 Companies Act 2006

[4] See this AccountingWeb article