Local authority companies: dissolution v dormancy
Matt Marsh looks at the options available to local authorities when they have concluded that their subsidiary companies are no longer required.
In exercising its shareholder or member function in respect of a subsidiary company a local authority will be assessing the performance of the company against its business plan and in achieving its objectives.
For many local authorities and their companies, the time is likely to come when such an assessment raises questions as to the company’s continuation and future direction. This may be because the company is not performing as envisaged and is unlikely to do so; there has been a change in the local authority’s administration, strategies or objectives; the company has served its purposes; the rationale for which it was established may no longer exist, or any number reasons which may mean that even a company which is performing well might no longer be required.
Assuming that the company is not subject to or facing corporate insolvency, two options for dealing with the company are dissolving it by way of the voluntary strike-off procedure, or making the company dormant. While the course of action will likely be a ‘reserved matter’ for the local authority’s ultimate determination in its capacity as shareholder/member, it will be on the recommendation of the company’s board. In making the recommendation the directors must act in accordance with their duties as company directors and must be satisfied that the proposed course of action is in the best interests of the company.
Voluntary strike-off and dissolution
A solvent company may be dissolved following an application to the Registrar of Companies (Companies House) for the company to be voluntarily struck off the register of companies. Once the company is dissolved it will cease to exist and cannot generally be revived [1]. As such, if considering dissolution the local authority will need to be satisfied that the company has run its course and is no longer required for its original purpose nor for possible ‘re-purposing’.
The voluntary strike-off procedure is relatively quick and simple and is provided for under the Companies Act 2006. However, preparing a company for voluntary strike-off may require significant work to be undertaken, and certain statutory obligations must also be satisfied.
As a first step the board will usually need to obtain tax advice and a full assessment of the company’s existing tax liabilities will need to be undertaken.
An assessment of the company’s property and assets will also need to be carried out, and provisions made for the discharge or transfer of the company’s debts and financial liabilities, the transfer or disposal of its assets, the novation, assignment or termination of the company’s contracts, and the transfer or redundancy of any staff.
If the company is limited by shares, consideration will also need to be given to potential distributions and the return of share capital.
Once the company has been ‘emptied’ an application for voluntary strike-off can be submitted to Companies House and if accepted it will be entered on the company’s public record and notification published in the Gazette. Assuming there are no objections [3] to the strike-off in the meantime, not less than two months after the publication of the notice, the company will be struck from the register of companies and dissolved.
Placing the company into dormancy
If the company is no longer carrying out its business but a local authority is not yet ready to ‘pull the plug’, the local authority may make the company dormant for the purpose of Companies House. A dormant company cannot trade, carry on its business or undertake any activities which generate income, but will remain on the register of companies. As such, a dormant company continues to exist as a legal entity and can be revived at a future date simply by recommencing its business.
A dormant company must have at least one director who is a ‘natural person’ who remains bound by their director duties, and the company must continue to file annual accounts [4] and its annual confirmation statement. Companies House will determine whether or not a company is/remains dormant on the basis of it having no significant accounting transactions recorded in the fiscal year for which it files accounts with HMRC and Companies House itself.
However, once HMRC [5] has been informed of the company’s dormancy, it will not be required to pay corporation tax or file a tax return until it starts trading again.
Preparing to make a company dormant is similar to preparing for voluntary strike-off and provision must be made to ensure that the company ceases trading, carrying on its business or generating income prior to and during its dormancy. A company can remain dormant indefinitely until such time as it becomes active again. A dormant company may be reactivated intentionally, through recommencing trade subsequent to an application to HMRC, but will also be considered active by Companies House if it otherwise engages in certain activities [6], whether intentionally or not, during its purported dormancy. Once reactivated, the company will again be liable for tax and other purposes.
If a local authority subsequently decides that a dormant company should be dissolved, much of the preparatory work will already have been undertaken and as such it should be a short step to applying for the company’s voluntary strike.
Matt Marsh is a solicitor in the Local Government team at Anthony Collins.
1 A dissolved company can be reinstated in prescribed circumstances.
2 Such as notifying the company’s creditors of the proposed strike-off.
3 Creditors and other ‘interested persons’ may be able to object to an application for voluntary strike-off. 4 Depending on the size of the company, usually ‘accounts for a dormant company’.
5 HMRC must be notified of the intention to make a company dormant.
6 Filing the annual accounts and confirmation statement will not reactivate a dormant company.
