Purchase of own shares

Purchase of own shares

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I act for a medium sized owner managed business. Last year the shares of two directors were repurchased by the company as part of a buyout and reorganisation by the remaining director.

The accountancy firm advising on the buyout (not me I haste to add)sought and obtained Revenue clearance for the transaction to be treated as a capital transaction.

The consideration paid of £750K was based on management accounts prepared by the company for the 11 month period ended 30 September 2003. The management accounts indicated that the company had sufficient in year profits and reserves brought forward to cover the £750K consideration.The company's year end was then extended to 31 December 2003.

I am currently performing the year end audit. The draft accounts show that the company has made a loss of £290K for the 15 month period. I think work in progress was overstated by £400k at 30 September 2003!

Profit and loss account reserves brought forward amount to £440k, therefore the company is now left with a deficit balance sheet showing reserves of -£600K.

What are the legal and tax implications for the company?

What are the legal and tax implications for the two directors?

Will they have to repay part of the consideration received?

How do I show and refer to this in the annual accounts?

What do I say in my audit report?

This is the first time I have come across this problem, so any help would be appreciated!

John Monaghan

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By AnonymousUser
28th Jul 2004 13:51

More questions than answers

If clearance was sought then the Revenue have to be advised of changes in the facts originally presented to them and you will have to wait to find out what they say. I have no experience of this but would consider that approval would be withdrawn and the payment would be deemed to be a distribution. This then raises the question of there being an illegal dividend which I understand would have to be repaid to the company.

I presume that the individuals who received the payment for their shares were also the directors who voted on the scheme. If so I would think that they are on seriously thin ice if no dividend repayment is made.

Presumably without the repayment the company will be unable to continue trading. If so you will have to qualify your report on the going concern basis. If the ex directors/shareholders do make repayment then you main problems have probably been resolved, but there are too many unknowns to comment further.

With a deficiency of assets of c£600k there are some significant losers if the company is unable to continue trading. I would think it highly likely that a prosecution would be brought against the directors if there were large losses to the Crown, on the basis that the directors had lined their pockets at the Revenue's expense. It would be crucial to know on what basis the 30 September figures were prepared and also whether the directors were aware of any factors which could have led them to believe that WIP was overvalued at that time. Why extend the year end and was that an attempt to cover the facts?

Finally if you suspect or have reasonable grounds for suspecting that this buy back was deliberately orchestrated to get money out of the company, when the directors knew that WIP was overvalued, I believe you may have a Money Laundering reporting requirement.

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