Redundant companies, voluntary strike off and the forgotten bank account

In house lawyers will frequently be involved in asset sales or corporate restructuring exercises, during which group companies may become redundant and ultimately wound up and dissolved.

Whilst these exercises generally proceed smoothly, sometimes the process has a sting in the tail. We have seen a number of cases where the dissolved company had a bank account in its name that had been overlooked, and the bank refused to release the funds. This can be resolved, but it involves time and expense which is far better avoided.

Voluntary strike off and dissolution

Where a group company becomes redundant following a restructuring or asset sale, it will still be subject to obligations about filing accounts and confirmation statements at Companies House (breaches of which will be offences by the company and its officers, who will be liable to sanction). This can add to the burden (and stress) of in house lawyers and company secretaries.

Generally, unless the company is intended to become active again in the future, it will be best to dissolve it to avoid this burden.

Unless the company is insolvent, the dissolution is generally achieved by applying for voluntary strike off. This can only be done when the company’s business has been wound up, so generally there will be a delay of at least three months between the conclusion restructuring exercise and the application for strike off.  During this statutory three month period, the company must not have changed its name, traded or carried on business, disposed of property or rights for value or engaged in any other activity beyond that necessary to wind up its business.

In our experience, this delay can mean that those who know the company best may no longer be involved when the application for strike off is made. For example, the former executive directors may already have resigned. This is when key information can be overlooked.

The application itself is very simple. Form DS01 is completed, with a director signing to confirm that the company has not carried out any of the prohibited activities in the past three months. It is filed at Companies House with a fee of £10, then notice must be given within seven days to interested parties; shareholders, directors (other than those signing the form), creditors and employees.   Companies House will issue a notice of proposed strike off and, unless any interested person (such as someone claiming to be a creditor) objects in the meantime, the strike off will be triggered after a period of not less than two months. The company’s name will be struck off the register and it will be dissolved.

Consequences of dissolution

When a company is dissolved, it will cease to exist as a legal entity. It will be incapable of owning property or other legal rights. As a result, any property or legal rights formerly owned by or held on trust for the company will be deemed bona vacantia – they will belong to the Crown, which will usually act through the Treasury Solicitor as part of the Government Legal Department.  (In some geographical areas, bona vacantia actually pass to the Duchy of Lancaster or the Duke of Cornwall rather than the Crown, although the principles are the same – for simplicity, we will refer to the position with the Crown below.)

In most cases where a company is struck off voluntarily, all its assets will have been dealt with well beforehand. However, we have seen a number of cases where assets had been overlooked or forgotten. This has most commonly been in the form of bank accounts in the name of the dissolved company. Sometimes the existence of the account had simply been forgotten. Perhaps more common was that the group was aware of the account and the funds held, but did not realise either that the account was still in the name of the redundant company or what the consequences of this were.

When a bank becomes aware that a company has been dissolved (which generally happens quickly), it immediately freezes all accounts in the name of the company, pending a transfer of the contents to the Crown. The bank will no longer act on any instructions of the former directors of the company or of any its former group companies. This is the case even if the rest of the group is still an active customer of the bank. Often the first time anyone becomes aware of an issue is when the group tries to access the account and the bank tell them it is frozen. Whilst the banks tend to be sympathetic to the plight of their customers, they will not be persuaded to release the funds to anyone other than the Treasury Solicitor unless and until the company is restored to the register.

The existence of a forgotten bank account is often the trigger for the group to realise that there is a problem. There is not necessarily any trigger in relation to other types of assets, so the problem can lie hidden for many years and only come to light at a crisis point. More rarely, the forgotten asset in question may be an interest in property. Suddenly discovering that the group does not own the property it operates from can come as quite a shock.

What happens to bona vacantia?

Bona vacantia funds in bank accounts will be transferred to the Treasury Solicitor and ultimately paid into the Treasury. This does not happen immediately, so it is sensible to ask the bank as soon as possible not to make the transfer whilst steps are taken to rectify the matter.

The position with other assets is not so simple.  Whilst assets will automatically be deemed to become bona vacantia at dissolution, there is no active monitoring of the situation. For example, the Land Registry will not automatically remove a dissolved company as the registered proprietor of property – an application must be made by the Crown to be registered as proprietor. Unless the Treasury Solicitor is given notice, the Crown will not necessarily become aware of any land or other assets which it owns.

Where the Crown does become aware of bona vacantia which it owns, it can either disclaim it (which it may do for leasehold property, effectively ending the leasehold interest) or sell it and pay the proceeds into the Treasury. It is always an option for the group to purchase freehold bona vacantia land back from the Crown, but it is not an attractive option as the sale will be at market value. There is always a risk that the Crown may sell freehold land to a third party, which could be extremely problematic, particularly if the group occupies the land.

Where the Crown is not aware of bona vacantia, the practical outcome is that the asset could still be used by the group. If the asset is something minor (for example, pallets used in a factory) the group may take a view that this is not a significant issue. However, where the asset is significant, there will always be a risk in burying your head in the sand; sooner or later an issue is likely to flare up.

How to solve the problem

1 – Prevention

The best option is to avoid these issues altogether by ensuring that full due diligence is carried out on any company which is intended to be struck off voluntarily. These issues may have been considered during any prior restructuring or asset sale, but our experience shows that there are often gaps, particularly where external solicitors or accountants assisting with the transaction may be unaware of the potential existence of certain types of assets.

This due diligence should be done as soon as any restructuring or asset sale is concluded to ensure that those who understand how the business operated (and may remember events from years before) can be involved, rather than months later when the directors may have changed. It should consider the following:

• Is there a possibility that the redundant company still holds bank accounts in its name which may be used by the group? It would be prudent to carry out a full audit of all bank accounts used by the group.
• Does the redundant company have any interest in property which is used by the group? Historic leases in particular may be an issue, and surprisingly easy to overlook.
• Does the group use any other (non-property) assets which may be held by the redundant company? Practically speaking, small tangible goods may not be a significant issue but consider whether, for example, any longstanding hire purchase agreements for equipment (and so, a right to acquire title) may be in the name of the redundant company?
• Does the company own shares in any other companies? Where a company has been operating for a long time, it can be easy to lose track of shares – particularly historic minor shareholdings outside the main group companies.
• Is it possible that the redundant company had been named the beneficiary of a trust? This is perhaps the most unlikely situation but may be a quirk where, for example, the group has grown up from a family business.

It may be helpful to prepare a simple checklist to run though for all redundant companies which covers not only the confirmations required for the form DS01 but also these additional considerations.

2 – Cure

If you do find yourself in the situation where, for example, your bank has notified you that it has frozen the account of a dissolved company and you want to recover those funds, then you will need to act quickly.  The good news is that you should be able to rewind the position to recover the assets.

A former director or shareholder should make an application to court for an order restoring the dissolved company to the register within 6 years of the dissolution. If an order is made, the court will direct Companies House to restore the company, and it will come back into existence as if it had never been dissolved. It will have the same directors and shareholders it had at the moment before dissolution.

Its assets will no longer be deemed bona vacantia but will once again belong to the company. Where no actions have been taken with those assets, recovering them is a simple process. For example, where funds were held in a frozen account, you can apply for them to be repaid by cheque. However, where the Crown has taken control of and disposed of assets, the company will need to apply to the Treasury Solicitor for the proceeds of sale. If, for example, freehold land has been sold by the Crown during the period of dissolution, only the proceeds of sale but not the title to the land can be recovered. This could still lead to issues, and is one of the reasons why action should be taken as soon as possible.

The application to the court will need to set out certain information about the company and the reason why it is being made. It will be necessary to seek a bona vacantia waiver from the Treasury Solicitor and, where this is provided, it is usually possible to deal with the matter with the consent of the Registrar of Companies.

However, even when it runs smoothly, the process is not quick and will involve quite a lot of work in drafting documents and corresponding with various parties involved.  It usually takes around six months between issuing an application and the company being restored. It may take longer still to recover assets. In addition, the company will be obliged to file accounts covering the period during which it had been dissolved, and may be liable for penalties for late filing.

We have successfully applied to restore a number of dissolved companies to the register so that forgotten assets can be recovered and would be happy to discuss any queries with you.