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Retained losses - Share Capital Reduction?

Sub has retained losses and has ceased trading, intention to reduce share capital and wind up Sub Co

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A parent company bought 100% of the shares in a company some years ago and immediately hived up the assets into the parent company. The subsidiary now dormant with only a debit balance for amount receivable from the parent company from the hive up. This balance equals the share capital of the company less the retained losses. 

The parent company now wishes to wind up the subsidiary company, but wishes to reduce the share capital prior to winding up. To illustrate, the balance in the subsidiary is:

Amount Receivable from Parent Company - Dr £100,001

Retained Losses - Dr £100,000

Share Capital - Cr £200,001

The intention is to reduce share capital in 2 stages. The First stage is to reduce the share capital by £100,000 (being the excess of share capital over value of assets) as the share capital is no longer supported by the company's assets. The Second stage will repay £100,000 share capital not required back to the parent company (Dr share capital, Cr amount receivable from parent) before cancelling the shares leaving just £1 share remaining for the winding up which the liquidator advises is required. 

The accounting entries for the second stage I understand, but I can't see what the entries would be where the shares are cancelled in the fist stage due to no longer being supported by the companies assets. It would make sense for these entries to all occur within equity (Dr Share Cap, Cr Retained earning for example) but I can't seem to find much guidance relevant to this scenario (where share values are not supported by the assets of the company). 

Has anyone processed this kind of transaction before and have any advice on what the entries would be or know of any guidance available for this scenario (as opposed to general capital reduction/share buy back guidance which seems to be covered by most guidance). 

Many thanks. 

WA.

Replies (16)

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By johngroganjga
06th Mar 2019 11:44

What is the reason for this very long winded and unnecessarily complicated sequence of events? Is someone over-thinking?

Why not just strike the subsidiary off. Job done.

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 12:46

Agreed

To avoid any possible bona vacantia issues it may be advisable to write off the inter-company debt first.

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 13:47

But the distribution of the capital repays the loan. What will be left for the subsidiary to waive?

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 13:58

What distribution, John? Informal strike-offs do not generally involve a distribution - unless it is made prior to the striking off. In absence of such, subsidiary will be dissolved whilst holding an asset in the form of the debt. The chances of the TS seeking to recover it would be remote, but why take the risk?

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 14:08

Plainly the last thing the company will do will be to distribute the share capital to those entitled to it.

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 14:16

You’ve lost me, John. In all the informal strike-offs that I’ve seen I have never come across a case of the share capital being distributed to anyone- the company simply disappears and the shares cease to exist.

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 14:18

So if the shares cease to exist, what else in the balance sheet of this company ceases to exist as well?

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 14:33

As far as the TS is concerned, nothing. In the same way that if a company is struck off with £100k in the bank that cash doesn't suddenly cease to exist. The intercompany debt remains, but now in the hands of the TS as creditor.

As I said above, the chances of the TS pursuing the debt are probably slim but why take the risk?

But I'd still be interested for your explanation of how share capital is distributed to shareholders in the event of an informal striking off - it doesn't make any sense to me.

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 14:59

Wilson Philips wrote:

But I'd still be interested for your explanation of how share capital is distributed to shareholders in the event of an informal striking off - it doesn't make any sense to me.

So you advise your clients going to strike off their companies that they must keep assets on their balance sheets equal to their share capital (less accumulated losses, if any) and that in no circumstances must they distribute them?

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 15:06

Of course I don't, John. But that is not addressing my question, which you seem to insist on avoiding.

Can you please explain how and why there would be a distribution of share capital in an informal striking off (or, for that matter a formal liquidation, since I've never seen a distribution of a company's share capital in that scenario either).

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 15:14

I am not avoiding the question I am answering it. So if you don't advise clients to retain assets equal to the share capital you must tell them to distribute them. Once all the profits have been distributed, what are you distributing?

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Replying to johngroganjga:
Psycho
By Wilson Philips
06th Mar 2019 15:27

You are distributing assets. Distributing assets equal to share capital is not the same as distributing share capital. If you meant to say assets equal to share capital, why didn't you say so in the first place, or explain when asked - or do you get a kick out of being awkward?

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Replying to Wilson Philips:
By johngroganjga
06th Mar 2019 15:36

Where do you put the debit entry then, if not to share capital?

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Replying to Wilson Philips:
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By Weald Accountant
06th Mar 2019 14:19

Thanks Wilson. I has assumed (probably incorrectly) that simply writing off the debtor to avoid bona vacantia balances was a shortcut that could perhaps be challenged and that a share capital reduction (while more paperwork) was the 'proper' way to do it.

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Replying to Weald Accountant:
Psycho
By Wilson Philips
06th Mar 2019 14:35

As far as the TS is concerned, all he is interested in is assets in existence at the time of striking off.

Other interested parties (eg creditors, if there had been any) might have challenged the debt release, but that is another matter.

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Replying to johngroganjga:
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By Weald Accountant
06th Mar 2019 13:27

To be honest John, yes quite possibly. The liquidator has been involved with various other work for other subsidiaries and just advised that this was the route to follow for this one. I may have missed something which forces it down this route but will certainly go back to them now and just make sure we have't overlooked the obvious. Thanks.

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