Bona Vacantia Guidelines Withdrawn

The Bona Vacantia Division of the Treasury Solicitor’s Department withdrew its guidelines BVC17 from 14 October 2011, and explained its reasons for withdrawal.

In summary the guidelines explained why in recent times the treasury solicitor has exercised a concession under which it would not seek to recover share capital paid out during a company strike off if the amount of share capital involved was less than £4,000. The main points contained within the guidelines of BVC17 (see appendix A below).

BVC17 was removed on 14 October 2011 because it is now easier to reduce share capital and to restore a company to the register under the Companies Act 2006 than it was with the Companies Act 1985.

Before a company is dissolved shareholders should ensure that assets owned by the company are dealt with and transferred out of the company’s ownership. If this is not done, you cannot make any distributions or deal with any of the company assets after dissolution. Assets owned by the company immediately at dissolution will pass into the ownership of the crown as bona vacantia. You cannot, therefore, make any distributions or deal with any of the company assets if the company has been dissolved.

Distributions will need to comply with the requirements of the Companies Act 2006. This means either making income distributions in the form of dividends which can be paid out of distributable reserves or the company can deduce its share capital to a nominal £1 (or one share) by purchasing its own shares, to avoid possible problems with bona vacantia then use HMRC extra-statutory concession C16 to pay out any remaining distributable reserves which will then be subject to capital gains in the hands of the shareholders. HMRC’s extra-statutory concession C16 can be found at (add website link for IP or see appendix B re website article)

HMRC issued a consultation document in 2010 which included a draft statutory ESC C16. The proposal is to limit the amount of the distribution which can currently be made using ESC 16 to £4,000 even if the company has distributable reserves which exceed £4,000.

Appendix A

The main points contained within the guidelines of BVC17 previously issued by the treasury solicitor were as follows:

When a company that was registered under the Companies Acts is dissolved, all its property and rights in England and Wales (but not its liabilities) pass to the crown as bona vacantia (which is a Latin expression meaning ‘ownerless property’) because of Section 654 of the Companies Act 1985 or Section 1012 of the Companies Act 2006, depending on when the company was dissolved.

If the company’s last registered office was in England or Wales (other than in the Duchies of Cornwall or Lancaster) we are nominated by the crown to deal with its property and rights.

Bona vacantia property belongs to the crown, and the crown is not obliged to deal with it in any particular way. Normally it would be disclaimed (ie the crown gives up its interest) or sold, and the proceeds of sale transferred to the exchequer to be dealt with in the same way as money raised by general taxation.

Before a company is dissolved, the member should ensure that assets owned by the company are dealt with prior to dissolution and transferred out of the company’s ownership. If this is not done, assets owned by the company at the date of dissolution will pass into the ownership of the crown. Such assets are then known as bona vacantia.

When shares are created by a company they are said to be ‘issued’ by the company to the members who have contracted to buy them. Once the shares have been issued, they form part of the ‘capital’ of the company, in the technical sense to mean the liability that the company has to its shareholders. The ‘share capital’ is therefore a liability of the company, since a company will eventually have to repay the shareholders the amount of their investment. Usually this only happens when a company is wound up. For the protection of the creditors and other people dealing with the company, the share capital to be ‘maintained’ by the company.

This does not mean that the money invested by the shareholders has to be deposited, or set aside as a separate fund to guarantee the company’s creditors. It only means that the fund must not, normally, be returned to the shareholders whilst the company is a going concern. The money is usually spent by the company to get its business going, and used to buy stock, rent or buy premises, pay wages, invest in plant and machinery, or pay the general expenses involved in setting up and running a business.

One consequence of the rule that share capital has to be ‘maintained’ is that dividends paid to the shareholders may only be paid out of the company’s profits. Another consequence is that capital invested by the shareholders cannot be returned to them except:

  • the Companies Acts deals with the cases where, with the approval of the Court, capital can be returned to the shareholders;
  • when the company is put into liquidation; or
  • where the company redeems or purchases its own shares.

If there is an unauthorised return of the share capital to the members, the company has a right to recover that money from its members. That right of recovery from the members is a ‘right’ for the purposes of Section 654 of the Companies Act 1985 (Section 1012 of the Companies Act 2006), which would pass to the crown as bona vacantia when the company is dissolved. If there was an unauthorised distribution of share capital to the members prior to dissolution, therefore, the crown would be entitled to recover that distribution from the members. The only legal way to avoid this ‘right’ passing to the crown as bona vacantia is to put the company into formal liquidation prior to dissolution, or to legally reduce the amount of the share capital prior to the company dissolution.

It has been recognised that it would be unreasonable for the treasury solicitor to expect that a company is put into formal liquidation when that would be uneconomic, especially bearing in mind that HM Revenue and Customs Extra Statutory Concession C16 permits a distribution for tax purposes without the company having to incur the costs of a formal liquidation. It is therefore been agreed with HM Treasury that if:

(i) a company has been struck off under Section 652A of the Companies Act 1985 or 1003 of the Companies Act 2006;

(ii) the shareholders have taken advantage of the extra statutory concession C16; and

(iii) the amount of the distribution is £4,000 or less.

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.

Since 1 October 2009 Section 641 of the Companies Act 2006 has been implemented in full. This provides companies with a further legitimate way of reducing their share capital. Section 641(a) gives private companies the option of reducing the amount of their share capital by special resolution supported by a solvency statement made by the directors.

If a company takes advantage of this provision then the same principles explained above apply. If the reduction of share capital results in unauthorised distributions of £4,000 or less then the bona vacantia right will be waived. If the unauthorised distribution is more than £4,000 then the bona vacantia interest will remain.

In these withdrawn guidelines the reference to ‘share capital’ had the same meaning as that expression has in Part 17, Chapter 1 (sections 540 to 548) of the Companies Act 2006.

If the amount of the share capital exceeds £4,000, the company should be put into liquidation prior to dissolution, or steps taken to legally reduce the amount of the share capital to below £4,000 prior to the dissolution of the company.

Section 654 of the Companies Act 1985 and Section 1012 of the Companies Act 2006 only applies to property and rights that were owned by the company ‘at the date of dissolution’. The treasury solicitor generally has no interest or jurisdiction in respect of any distributions or other matters relating to the company that were made or dealt with prior to the company’s dissolution, unless the distribution created a ‘right’ in favour of the company to demand the return of the distribution.

The fundamental question, therefore, is always whether or not the company had any right to demand the return of all or any part of the distribution that had been paid to the members prior to dissolution. If it did have such a right, that would have passed to the crown as bona vacantia. In theory, therefore, the crown could recover that sum once the company had been struck off, so long as it does not come within the ambit of our concession.

Whether or not the crown would actually take legal proceedings against the former members for the return of the distribution depends upon a number of matters. First, the treasury solicitor is not notified by Companies House when a company is dissolved, and we have no information as to what sums (if any) were distributed to the members prior to dissolution. The treasury solicitor will not therefore be in a position to take any action until somebody draws the matter to their attention. Second, the crown will not embark upon speculative or pointless proceedings, so we would have to be sure that there was a good chance of the proceedings being successful, both legally and financially. Before taking legal proceedings the treasury solicitor would therefore take advice from specialist counsel upon whether the distribution in question was lawful. If the company could be restored to the register, legal proceedings would probably be pointless, because the members could frustrate any proceedings by the crown, by restoring the company.

As to what sums can be lawfully distributed to the members out of the company’s profits as dividends, you should consult the provisions contained in Part 23 of the Companies Act 2006, which lays down clear rules as to what payments can be made as dividends to the members.

Appendix B

HM Revenue & Customs extra-statutory concession C16 states the following:

Dissolution of companies under Sections 652 and 652A Companies Act 1985:

Distributions to shareholders 

A distribution of assets to its shareholders by a company which is then dissolved under Section 652 or Section 652A Companies Act 1985 (or any comparable provisions) is strictly an income distribution within Section 209, ICTA 1988. In most circumstances, and providing 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 purpose of calculating any chargeable gains arising to them on the disposal of their shares in the company. The assurances include:

the company: 

  • does not intend to trade or carry on business in future; and 
  • intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and 
  • intends to seek or accept striking off and dissolution. 

the company and its shareholders agree that: 

  • they will supply such information as is necessary to determine, and will pay, any Corporation Tax liability on income or capital gains; and 
  • the shareholders will pay any capital gains tax liability (or corporation tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up.