The corporate structure is an important and sometimes overlooked area in larger groups of companies. Multi-entity organisations can reap the benefits of a review of their current structures to identify redundant companies. These may have been accumulated over time by, for example, acquisitions and mergers or special purpose vehicles set up for specific projects or joint ventures.
On average, FTSE 100 members incur between £150,000 and £300,000 per annum in non-value-added direct costs for dormant and non-trading companies. Recent analysis into the structures of FTSE 350 organisations revealed that more than 50% of these companies are lying dormant. Such figures would suggest that there are several benefits to undertaking a streamlining exercise and eliminating unwanted entities.
Costs
Redundant entities often fall beneath the radar once they are no longer financially significant to the organisation. Yet dormant companies can tie up valuable management resources because of the need to comply with statutory requirements, such as producing annual returns and accounts and maintaining books and records. Failure to adhere to these various reporting and taxation deadlines can result in fines.
Reduce risk and corporate governance failings
Dormant entities that are not regularly reviewed or supervised can be susceptible to fraud. There are many examples of dormant companies that have been used to obtain unauthorised goods, services or credit. The risk of corporate identity fraud is increasingly commented on, particularly following regulatory changes. These changes allow the e-service of documentation to Companies House, where confirmation of filings are not confirmed to the server, but are in the public domain to enable 'verification' of the existence of company officers for example, which may or may not be accurate.
It is important to stakeholders and regulators that the board is seen to be in control of the group it manages, as an extended group structure of dormant companies can be viewed as an avoidable compliance risk.
Dissolving unwanted entities
There are two routes for dissolving unwanted corporate entities.
1. Members Voluntary Liquidation
Formally winding up a company though a Members Voluntary Liquidation (MVL) resolves any outstanding matters and brings finality to an entity by ensuring that all liabilities, including contingent liabilities, are dealt with. It can also uncover 'forgotten' assets (often tax related) and ensure that no unforeseen liabilities arise going forward. In some circumstances, it can release tied up capital and allow a tax-efficient exit route for shareholders.
2. Strike-off
A strike-off is appropriate for dormant companies where it is certain there are no actual or contingent assets and liabilities, and where the company has not traded for at least three months. The process is less stringent and costly than a MVL, but carries more risks. For example, an application can be made to restore the entity to the Registrar of Companies for investigation, whereas the MVL process is final.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.