The lengthening of the restoration period for dormant companies may make a solvent liquidation an attractive option for some companies. James Stonebridge examines the impact of changes introduced under the Companies Act 2006.
A large number of group companies are dormant, with the cost of keeping them in existence increasing year-on-year. Now may be an appropriate time to consider whether such companies can be liquidated by a members’ voluntary liquidation (otherwise known as a solvent liquidation). This is because from October of next year, the time period for such companies to be restored to life after liquidation increases.
Many view the striking off of a company as an acceptable alternative to undergoing a solvent liquidation and, indeed, there are instances where this may be the case. But a liquidation should in the vast majority of cases be favoured over a strike off, for a number of reasons, including the greater degree of certainty and finality obtained from a solvent liquidation.
In relation to the striking off of a company (as distinct from its dissolution after liquidation), if any member or creditor of the company or the company itself feels aggrieved that the Registrar has struck the company off the register, they presently have a period of twenty years from the publication of the final Gazette notice in which to apply to court to have the company restored to the register. The court may order the company to be restored to the register if it is satisfied that, at the time of the striking off, the company was carrying on business or in operation or otherwise that it is just that the company be restored to the register.
If a company has been dissolved, the liquidator of the company, or any other person appearing to the court to be interested, may make an application to the court to have the dissolution declared void. There is normally a period of two years from the date of the dissolution of the company in which to make such application. An application for the purpose of bringing proceedings against the company for damages for personal injury, however, is not subject to any time limit.
Key changes under the Companies Act 2006
Part 31 of the Companies Act 2006 (which will come into force on 1 October 2008) contains the provisions on the dissolution and restoration to the register of a company. These include the introduction of a new administrative restoration procedure, whereby companies may be restored to the register by the Registrar without an application to court. This procedure will only be available in certain limited circumstances (for example, where a company has been struck-off through inadvertence) and will be in addition to the ability to apply to court for restoration to the register.
Under the 2006 Act, there is a single, unified court procedure with a time limit of six years from the date of dissolution of the company in which to make the court application for restoration. This is unless the application is made for the purpose of bringing proceedings against the company for damages for personal injury, in which case there is no limit in time.
Third Parties (Rights Against Insurers) Act 1930 (the “Act”)
Where, under any contract of insurance, a person is insured against liabilities to third parties (which does not include reinsurance) which he may incur, then on the happening of certain bankruptcy events occuring in relation to the insured, the assured’s rights under the contract in respect of the liability are transferred to and vest in the third party to whom the liability was incurred. The situations include a voluntary liquidation other than for the purposes of reconstruction or amalgamation with another company. Most regard this as therefore including solvent liquidations in certain situations (albeit the Act was introduced to ameliorate the hardship caused where the assured became insolvent as opposed to where it remains solvent).
If a company has been dissolved without liability being established then, as the company no longer exists, the third party acquires no rights under the Act. Therefore this necessitates an application to court for restoration of the company to the register in order to allow the third party claim to be brought in order to establish liability.
In September 2002, the Law Commission issued a consultation paper on the Act and one of its recommendations was that a third party would no longer be required to take initial proceedings to restore a company to the register in order to bring an action. The hope and expectation was that the Law Commission’s proposals could be brought into effect by way of a Regulatory Reform Order (i.e. without the need for primary legislation). However, subsequently, there were concerns about the power to make these changes under the Regulatory Reform Order. On 8 January 2007, the Legislative and Regulatory Reform Act 2006 came into force, which replaced the Regulatory Reform Act 2001. It is hoped that this legislation may finally enable the proposals to be brought into force, but it is still not clear when, and if, this will come about.
The lengthening of the restoration period from two years to six years may be a justification for considering liquidations now. But, in practice, it is the costs associated with keeping such companies in existence which is likely to be the greater spur to start thinking about such issues.
As stated above, if the Law Commission’s proposals ever get implemented the reasons for restoration should be considerably less in any case