Further supplementary memorandum submitted
by Companies House
DISSOLUTION OF
COMPANIES
The Legal Framework
The Registrar of Companies operates two processes
for the dissolution of a company—compulsory and voluntary.
The Companies Act 1985 sets out a process under
which the Registrar may dissolve a company. It provides that the
Registrar may initiate the dissolution process if it appears to
him that the company is "no longer in business or operation".
It then provides for a number of procedural steps to follow in
terms of letters to be sent to the company registered office and
to directors, followed by the publication of the company name
in the London (or Edinburgh) Gazette. The company is dissolved
three months after its name is published in the Gazette, unless
the Registrar sees "cause to the contrary".
In addition, the Deregulation and Contracting
Out Act 1994 inserted into the Companies Act a process whereby
a company can apply to be dissolved. The new provisions placed
a duty on the directors of a company that had applied to be dissolved
to notify a range of interested parties (employees, members, creditors,
pension fund trustees or managers). As in the case of a compulsory
dissolution, the Registrar publishes the company name in the Gazette,
giving notice of his intention to dissolve it and inviting objections.
The Registrar's approach to applying the law
Compulsory Dissolution: company "not in business
or operation"
In most cases, the Registrar concludes that
a company is "not in business or operation" if it fails
to meet a statutory filing deadline and subsequently fails to
respond to a communication which warns the company that strike-off
action will be initiated in the event of no response.
The Registrar may also take this view if the
company resigns all serving officers and does not appoint new
officers, or if it comes to his attention that the Registered
Office address is ineffective.
Reasons for halting dissolution: signs of life
It is fundamental to the operation of the law
that only companies which are genuinely defunct should be struck
off. Dissolution is not a sanction for failure to meet one or
more obligations under the Companies Acts, and cannot be used
as such. It follows that the Registrar will not strike off a company
which shows a sign of life. Signs of life might include the filing
of a set of accounts or an annual return.
Reasons for halting dissolution: objections
The Registrar will also conclude that there
is "cause to the contrary" when notified by any person
that they have an outstanding claim against the company. Such
a person might be a creditor, or a person with an outstanding
legal claim. In many cases, HM Revenue and Customs objects to
the dissolution of a company pending outstanding tax issues to
be resolved.
In the case of a compulsory dissolution, the
Registrar places dissolution on hold for six months on receipt
of an objection.
In the case of a voluntary dissolution, the
Registrar will (assuming that the objector has prima facie a good
reason for objecting) place dissolution on hold for 12 weeks.
The objector is informed that their objection will lapse at the
end of this period unless in the meantime they take concrete steps
to pursue their claim against the company. In many cases this
will involve the actual initiation of legal proceedings, although
each case is treated on its merits.
Scope for alternative approaches
The Government's view is that the basic framework
and philosophy of the law in company dissolution is sound. The
Companies Act 2006, which comes into force in full in October
2009, reproduces the dissolution provisions of the Companies Act
1985. Parliament considered and rejected an amendment which would
have employed dissolution as a sanction for failure to file statutory
documents.
Companies House will shortly be introducing
a new enforcement process which is aimed at identifying at an
earlier stage—ie when a company first misses a filing deadline—which
companies have become defunct.
With regard to the handling of objections, the
Government's view is that the current process strikes the right
balance between the right of a company to be dissolved if it is
no longer needed and the right of an objector to resolve any outstanding
issues before the company is dissolved. It is already the case
that some companies are wrongly dissolved and subsequently restored
by a court because potential objectors are unaware of the impending
dissolution and do not act in time. If the Registrar were to be
more aggressive in requiring objectors to advance and prove their
case more quickly, the risk is that there would be a significant
increase in wrongful dissolutions.
18 September 2008
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