C16, 652a, BVC 17, oops

Whilst looking for something entirely unrelated, we came across Form BVC 17. Aah, yes, you say, that BVC 17

For the benefit of anyone honest enough to admit they were similarly clueless, form BVC 17 (version 2, and let's not dwell on how long version 1 had been in issue, nor what it said) is the Treasury Solicitor's guidelines over the distribution of a company's share capital, and can be found at the companies section on www.bonavacantia.gov.uk Whilst this is not strictly a tax matter within the Revenue's remit, a little bit of joined up governmental thinking would not hurt and the Revenue could very easily cross reference these guidelines in their own materials.

The guidelines are not contentious, nor objectionable. Rather, they can only be a good thing, in so far as they not only state a concessionary, relaxation of the strict law but, moreover, act as a reminder of what the law actually demands.

When a company is dissolved, any property which it owns then vests, under section 654 CA 1985, in the Crown as "bona vacantia". But, does the company still own any property ?

Where a company is dissolved, under s. 652a CA, it will usually be following a distribution of assets to the company's members pursuant to the obtaining of a Revenue clearance under ESC C16 that the distribution will not be liable to income tax but, rather, by concession, the capital gains treatment which would have been in point had the distribution been made in the course of a formal liquidation.

But, as BVC 17 serves to remind us, a C16 clearance is concerned only with affording a favourable tax treatment to those reserves which the company could have distributed in any event and which, in the absence of a formal liquidation, would have been subjected to income tax. A C16 clearance may confer the tax treatment afforded to a liquidation, but it does not replace a liquidation.

The upshot being, of course, that a company has no capacity to make a distribution of its share capital, share premium reserve and any non-distributable reserves. A company which does make such a distribution, with a C16 clearance or otherwise, makes a void distribution and the assets are held by the members on resulting trust for the company. If the company is then dissolved, the company still has an asset (i.e., the right to recovery) which is bona vacantia and vests in the Crown under s. 654 CA 1985.

With the ESC 16 route being commonly adopted by firms of solicitors and accountants as a relatively efficient way of bringing a solvent company to an end, and, most typically treating a C16 clearance as if it was equivalent to a formal liquidation, one should stop and question whether advising the company's members to follow this route is wise where the company has share capital etc., of any appreciable amount.

The aforementioned BVC 17 helpfully states a guideline that the Treasury Solicitor will not pursue the rights it has to the company's assets where those assets do not exceed £4,000. This limit is stated to be average cost of liquidating a company, which seems somewhat on the low side but one can see the logic. Over this limit, of £4,000, and the Crown will pursue the former members of the company for the recovery of assets which are bona vacantia. We assume, in practice, the Crown will only pursue this right where a creditor of the since dissolved company looks to take action against the Crown (a matter which we have never actually seen nor heard of happening).

Notwithstanding, there are, we suspect, more than a few companies with share capital and share premium account very much higher than £4,000 where the members have used the C16 process without paying mind to the requirements of the Companies Act and where, in theory at least, those erstwhile members are exposed to a recovery claim by the Crown.

Where such companies have acted upon the advice of a professional, and without receiving a health warning, one can see the potential for a claim and a notification to the firm's PII providers, who will probably say they knew all about BVC 17 !