ESC C16 and Share Capital of dissolved companies

BRI are proud of our reputation of always offering the best advice to the client regardless of the financial outcome to ourselves.

One of the most frequent examples of our approach is when discussing the winding-up of solvent companies. We always discuss with the prospective client the option of the extra statutory concession C16 (“ESC C16”) rather than incurring costs with us of a formal Members’ Voluntary Liquidation.

The concession is as follows:

“A distribution of assets to its shareholders by a company which is then dissolved under the Companies Act 1985 Section 652 or Section 652a (or any comparable provisions) is strictly an income distribution within TA 1988 Section 209. In most circumstances and provided that certain assurances are given to the Inspector before the event, the Revenue is prepared for tax purposes, to regard the distribution as having been made under a formal winding up so that the proviso to Section 209 (1) applies.

The value of the distribution is then treated as capital receipts of the shareholders for the purposes of calculating any chargeable gains arising to them on the disposal of the shares in the company.”

However, as the company is not in liquidation, Section 263 of the Companies Act prevents the company from making any distribution except out of profits available. Even when ESC C16 is applied, technically speaking, a sum equal to the issued share capital and any share premium is to be retained within the company. Clearly if this sum is negligible then it may be appropriate to use the ESC C16 route compared to the additional costs of appointing a liquidator.

It has always been possible for any unauthorised return of the share capital to the members to be recovered under the Section 654 Companies Act 1985. This right of recovery would then pass to the Crown by way of the Bona Vacantia office when the Company is dissolved. The only legal way to avoid this right passing to them is to put the company into formal liquidation prior to the dissolution.

The Treasury Solicitor’s office view about this matter has also been uncertain and, in particular, at what levels they may consider taking action in respect of unauthorised distributions. They have now issued guidance and it has been agreed between the Treasury Solicitor’s office and HM Treasury that if:-

1. a Company has been struck off under Section 652a of the Companies Act 1985, and
2. the shareholders have taken advantage of the extra statutory concession C16, and
3. the amount of distribution is less than £4,000

then, as a concession, the Treasury Solicitor will waive the Crown’s right to any funds, which were distributed to the former members prior to dissolution.  However, please note that this limit applies only to the share capital/premium balances to be distributed and not to the assets as a whole.

Hopefully, this provides helpful guidance, if however you require any further assistance on these guidelines or alternatively information regarding the costs of a formal members’ voluntary liquidation please contact any member of the BRI Management Team.

Important Note: This Briefing has been prepared as background information for the general professional adviser and is not a comprehensive statement of the law - we recommend that expert advice be taken on specific issues arising in practice.