We have a,client that has a dormant subsidiary.
The debtor in the subsidies accounts is £10,000 from the parent company.
The share capital is 10,000 ordinary shares.
If we strike off the subsidiary the holding company will write off the 10,000.
However, our client wonders if they could repay or reduce the share capital under the Companies Act and repay the amount using the share capital.
Replies (14)
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If the subsidiary is struck off the holding company will NOT be able to take its inter-company creditor to profit as the subsidiary will need the money to be able to repay its share capital.
A share capital reduction in the subsidiary would serve no purpose, even if it were possible.
Ah but...
... if you strike the subsidiary off when the parent owes it £10,000, doesn't the parent then end up owing £10,000 to the crown or one of the duchies John?
Be realistic!
In subsidiary:
Dr share capital £10k
Cr Interco £10k
In parent:
Dr Interco £10k
Cr Cost of investment £10k
Then strike of for £10. End of story.
Assets do go to the Crown
If you were keeping the company as dormant or not I would go through the reduction of capital route, we have done quite a number for unpaid shares, especially when members of the public decide it is a great idea to register their new incorporation direct with Companies House with a large number of shares.
The warning on the DS01 form for the striking off is very clear – “please note that on dissolution any remaining assets will be passed to the Crown.” In this case there is always the risk that the £10,000 debtor could be claimed, though very unlikely considering the new numbers of companies removed from the register each year. You should advise the client of the risk to cover yourself more than anything.
If you go ahead, for the board minutes and resolutions the following would be a good start.
“agreement had been reached for the Company to reduce its share capital by extinguishing the liability on 9,999 issued but unpaid Ordinary shares of £1.00 each and the cancellation of those same 9,999 shares.”
The following is what should be done
Draft board minutes of the directors recommending the reduction,A copy of a special resolution of members authorising the capital reduction,A copy of the solvency statement of the directors’ made in accordance with sections 642(1)(a) and 643 of the Companies Act 2006; all the company directors must sign the solvency statement.A statement of capital of the company (SH19SR); andA statement of compliance by the directors.
It will take you a good 2-3 hours in time and is only effective once Companies House process the documents.
If stuck or you require help we have a bit more info on our website page for this particular service
Steve ONeill
Business Tax Centre Limited
I think the assumption is ...
... the debtor is the unpaid share capital!
Unless formal procedures are carried out as outlined by Steveoneil legally the Holding company should pay over the capital and it would then have a cost of investment that would need to be written off to P&L.
Doing it as you suggest above is exactly the same proincipal as back dating dividends etc.
It would not be cost effective for the Crown to seek to recover £100 unpaid share capital, but for £10,000 it might take a different view!
It doesn't matter
What the £10,000 loan is, nor whether or not the shares are full paid (the capital can only be repaid, by defintion, to the extent that is was originally paid). If the company is struck off, then technically all of its assets (whatever they are) become the property of the crown.
Since the subsidiaries only asset is a debt owed by the parent, there is a risk that the crown could come to the parent and say you owe us £10,000.
They probably won't, and if they do there's then the small matter of whether the loan is transferable property or a contractual obligation to which privity applies.
As Steve says (and John has indicated) it's simple enough to be made a non-problem, so why not make it a non-problem?
I think all Arthur wanted to know was does any cash need to move. Personally, I don't think it does and with the benefit of Steve's paperwork, John's journal could be posted.
I would not bother with any paperwork as the risk of the Crown trying to collect the debt is, in my opinion, so negligible that life is too short to worry about it. However for those of a more nervous disposition a simpler way of reducing the negligible risk to zero is surely for the subsidiary to waive the loan (formally, under seal). Much easier than reducing the share capital.
In response to
johngroganjga PM | Tue, 15/10/2013 - 14:29 | Permalink
I would not bother with any paperwork as the risk of the Crown trying to collect the debt is, in my opinion, so negligible that life is too short to worry about it. However for those of a more nervous disposition a simpler way of reducing the negligible risk to zero is surely for the subsidiary to waive the loan (formally, under seal). Much easier than reducing the share capital.
There are a number of issues, firstly you cannot reduce share capital without a court order or a formal declaration of solvency any way, this is the way of getting rid of the liability. Ending a company is subject to the Insolvency Act as well as the Companies Act. Striking off is he informal version but subject to all the same rules. You may be also starting off on the wrong foot if the articles of the company does not allow for unpaid shares in which case you cannot write off any debt because there is no legal basis, however if the articles do have liens and forfeiture clauses you could do the paperwork for that, but it would be simpler and quicker to do the capital reduction scheme.
Secondly the capital route for waver by the Crown was changes in October 2011. The effect of this is that in theory, the Treasury Solicitor may pursue any distribution of capital not made in accordance with Company Law. The rationale behind this decision is that the implementation of the CA 2006 now makes it easier to reduce a company’s share capital.
Under Section 641 of the CA 2006 a private company may effect a reduction of its share capital by special resolution supported by a solvency statement made by the directors. Otherwise, a company may only make a return of capital to shareholders:-
by a reduction of share capital;where the company redeems or purchases its own shares;where there is a distribution of assets to members in a winding up
So a cavalier approach to the debt, would mean it is treated as income and not capital and may lead to an addition to the P&L and therefore taxable, or the Crown might just say I want it.
Steve ONeill
Business Tax Centre Ltd