You are very welcome to this, the second instalment, of Query Of The Week. Each week our technical team respond to a massive number of client queries. The purpose of Query Of The Week is to share with you the most common questions that keep coming up time and time again.
In this Query Of The Week, John Murphy examines options to dissolve a company and advantages and disadvantages of each.
End of Life Issues for Companies – Strike Offs & Restorations
If this Query Of The Week was of interest to you, you will also be interested in our End of Life Issues for Companies – Strike offs & Restorations webinar.
Full details for this webinar can be found here.
|CPD Allocation||1 Hour|
|Date||23 November 2018|
|Time||15:00 – 16:00|
|Presenter||John Murphy – OmniPro|
Query Of The Week – Video Transcript
(Please note that this is a direct unedited transcript of the spoken word as recorded on the video)
Hello, and welcome to this week’s query of the week. This came in through KnowledgeHub.
The question was, “My client has a company, it’s ceased trading, there are liabilities on the balance sheet, what is the best method, what’s the advantage of one method versus another method, in order to dissolve the company and get rid of it?”
To give some background as to what was on the balance sheet, they had current liabilities up in the liabilities section of 200,000, they had effectively net liabilities position of 200k, had ordinary capital of 50k, and then they had a P&L deficit of 250k, so it’s going to come back here 200k net liabilities in this, particular case. First of all, the option available in relation to getting rid of companies or dissolving companies, there are two options; the first option is to do a voluntary strike off, under section 731. Or, alternatively go down to members voluntary liquidation, under section 579.
What’s the best option?
You need to advise your client, so what I always say to clients when they ask me, “What’s the best option to do the voluntary strike off? Or do the member’s voluntary liquidation?” I say, “What has your company done? Has your company ever traded? If your company has never traded, then I’d say you might as well sign up for voluntary liquidation, go down the voluntary strike off route.” If your client has traded, I suppose it’s a riskier area where they’ve traded, well then I might say, “Well, go down the member’s voluntary liquidation route.”
Why do I say that?
If you go down the voluntary strike off route, creditors, whoever else, can reinstate the company within 20 years, you’re exposed for 20 years, whereas, if you go down the member’s voluntary liquidation route, you’re only exposed, they can only bring it back on to the registrar within two years. That’s kind of the high-level as to what option is better than the other.
Obviously, from a cost perspective, member’s voluntary liquidation is more costly than a voluntary strike off, as well, so that’s something that should be taken into account. I suppose, just in this particular example that we were looking, at, in order to do a member’s voluntary liquidation, that where you’re able to say you’ll pay your debts within 12 months of going into liquidation, or for voluntary strike off, in that particular case, you need to have your net assets less than or equal to 150 euro, liabilities less than or equal to 150 euro.
You can see in this particular case, neither route can be taken, because we’ve got a €200,000 liabilities in the balance sheet. This example was within a group, so therefore there was a debtor in that other group company’s books.
If we come into a voluntary strike off, you need to come down to less than €150,000 liabilities. In order to do that, what we would advise, “Look at your company, how did the creditor balance rise? From a tax perspective, you’re looking at section 87, did the 200k arise from trading with the other company? Or was is just money that was received for working capital or to purchase capital equipment? If it was, then the write-off would not be taxable, so it wouldn’t be and issue, likewise in the other side of the group, they wouldn’t get a tax deduction for the write-off.
Once you’ve done that, well then you’ve effectively come down to your net assets and liabilities being less than 150 euros, effectively from a voluntary strike off, where would you be? You would have zero liabilities or zero in the bank, let’s say, you’d have 50k of uninsured capital, and you have 50k of a deficit in the P&L, so you’re back to nil, obviously you’d have to have one euro at the top of the balance sheet. In this case, we are ready for voluntary strike off, if we want to go down that route. You can see the key thing, with the 150 euro, you’re looking at the net uninsured capital net of the P&L deficits, when you’re looking at 150. Because that’s sometimes a question, as well. Then you’re ready to go and do voluntary strike off, from that perspective.
If you enter member’s voluntary liquidation you have to be able to pay your debts within 12 months of going into liquidation, ordinarily you might see, “Can I write off the inter-company creditor on a balance sheet, so that we have a very clean balance sheet, when we go into liquidation, when we’re doing our statement of assets and liabilities as required by section 579, within three months to the date of being put into liquidation.” If you can go down that route and you’ve tested the tax consequences under section 87, make sure they’re not taxable, you’ll have a nil balance sheet, in your statement, assets and liabilities.
Another option as to why you might go to member’s voluntary liquidation route, is if this particular company did trade in the past, and it has a trade name similar to another company that is in the group, some entities might not want to put it into voluntary strike off because the name’s associated with that company, so they prefer to go into member’s voluntary liquidation.
So that’s our query of the week. If you have an interest in options to dissolve a company, join me here on Friday the 23rd of November at 15:00 for our webinar on End of Life Issues for Companies – Strike offs & Restorations.