Why it pays to clean up your corporate group

Defunct companies may have come into being following an acquisition or group reorganisation. Alternatively, a company may have been incorporated as a vehicle for a subsequently abortive commercial venture. A review of annual reports and accounts of groups operating in the food sector suggests that this is a common theme in the food and drink manufacturing sector.

These defunct companies may persist simply because the administrative burden is spread across the group, with the consequence that no single person has responsibility for them or appreciates the overall cost of their maintenance. There are several reasons why it can be beneficial to rationalise dormant subsidiaries.

Those are:

• The time and inconvenience of dealing with Her Majesty’s Revenue and Customs and Companies House filings
• Unnecessary audit fees
• The Registrar of Companies can strike defunct companies off the register if he considers he has not received documents from the company that he should have, or mail sent to the company is returned undelivered.  There may be a stigma attached to this
• The corporate structure may need simplification in order to release capital tied up in the business
• As a pre-sale step to facilitate a disposal
• Shareholders may be uneasy where there are a large number of dormant companies within the group.

A company that is not trading may apply to be struck off. It may do so, if in the previous three months, it has not changed its name, traded or otherwise carried on business for value. The same applies if it has not 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 or engaged in other activity except one necessary or expedient for making the application, settling the company's affairs or meeting a statutory requirement.

Struck off​

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

Where the company has a number of liabilities, particularly ones that may be difficult to identify, a members' voluntary liquidation (MVL) may be a better – albeit more expensive – option. 

An MVL could deal with those liabilities definitively by valuing and distributing in respect of them or by ensuring that no further claim can later be made. By contrast with a striking off, there remains the possibility of an application for restoration to the register for the purpose of dealing with those liabilities.  The effect of restoration is to deem the company to have continued in existence throughout the period of its dissolution so that, if there are any liabilities, the apparent benefit of striking off is lost.

Due diligence​

Once dissolved, the company's assets are deemed to be bona vacantia ​and vest in the crown. Due diligence should be undertaken 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 outstanding contracts to which the company is party; 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.  Similarly, liabilities must be identified and eliminated to guard against the risk of a subsequent application for restoration.

Provided the process is carried out properly, tidying up the corporate group is a relatively pain-free way of reducing the administrative burden and enhancing transparency.

• Richard Naish is partner in the corporate department and co-chair of the Food Group at law firm Walker Morris LLP.  He advises companies on all aspects of corporate law, from compliance topics to fundraisings, restructurings, joint ventures and mergers and acquisitions.