Out Of Business

If a company is effectively dormant, now might be the time to wind it up in order to save money on compliance costs

IN A SIGN of the times, where once the classified ads of the business press contained ads for company formation, these days you are just as likely to find ones assisting you to shut a company down. Accountancy practices are promoting services to provide an orderly wind-up of firms that no longer perform a useful role for their directors.

Unlike the many high profile firms dragged through the courts by creditors, these firms are generally not insolvent but they are not without their headaches either.

In the boom years of the Celtic Tiger, many entrepreneurs and businesses looked at new and innovative products or services to bring to the market and established company vehicles for this purpose. In some cases, individuals who were in employment set up businesses as a sideline in order to enhance their income. Many of these businesses were associated with the construction trade.

There was a marked increase in the number of limited company formations in the mid-noughties. Some of these companies never traded, whilst others traded for a short period of time but did not fulfil their owner’s expectations and ultimately ceased operations.

Setting up a company is relatively easy and inexpensive. However, the compliance costs associated with a firm can be significant for an entity that is effectively dormant. In a shrinking economy, many self-employed individuals have also concluded that they might be better off operating as a sole trader.

In Ireland, limited companies have serious compliance obligations. The costs involved in maintaining such companies can be onerous and include the preparing of accounts, filing of annual returns with the Companies Registration Office and the completion and submission of a series of tax returns to the Revenue Commissioners.

Figures supplied to The Irish Timesby the Companies Registration Office for the 11 months to the end of November 2009 confirm an increased level of voluntary strike-offs. There were 4,832 in that period, compared to 4,476 in the corresponding period of 2008. Surprisingly, the number of involuntary strike-offs was actually down from 5,457 to 5,079.

There are two main ways of disposing of a solvent Irish registered company – a voluntary strike-off or a members’ voluntary liquidation, explains Brendan O’Donoghue of accountants Russell Brennan Keane, a specialist in this area. “Strike-off can be a cost effective alternative to liquidation,” he says.

“A company that has never traded or has ceased trading may apply to the Registrar of Companies to be struck off. To avail of this process, the company must be solvent and have no debts due to any of its creditors,” he says.

The process involves a number of steps, he says. Firstly, the company must issue a statement that it has ceased to trade and has no assets or liabilities. It must obtain a letter from the Revenue Commissioners stating that it has no objection to the proposed strike-off application; submit all outstanding Companies Registration Office and taxation returns; and advertise its intention to apply for strike off in a daily newspaper circulating in the locality of its registered office.

In most cases this is the end of the matter. However, in some cases the company may have a Lazarus-like reincarnation. “The key point to the strike-off process is that any aggrieved creditor, or indeed shareholder, can apply to Registrar of Companies within 12 months of dissolution or to the High Court within 20 years, to have a company restored to the Register of Companies. This could have ramifications for company directors and shareholders,” he says.

Instances where this might arise could relate to liability in regard to the supply of a defective product; where a financial liability exists that had been concealed or had not come to light; and where an aggrieved party wishes to hold the directors to account.

Where a company has traded in the recent past, a members’ voluntary winding-up provides more certainty for its directors where all of its creditors have been, or will be, paid in full. There is no requirement to file outstanding Companies Registration Office returns,” says O’Donoghue.

The procedure is quite straightforward. The directors hold a meeting where it is resolved that the company will be wound up as a members’ voluntary liquidation. A meeting of the shareholders or “members” is convened. A Declaration of Solvency, incorporating a statement of assets and liabilities, is sworn by all or the majority of the company directors. A report is prepared by an independent accountant – usually the company auditors – confirming the reasonableness of the statement of assets and liabilities, a meeting of the members takes place and a liquidator is appointed.

Whilst it is not obligatory, it is a good idea if the liquidator advertises for creditor claims so as to obtain certainty, says O’Donoghue. The liquidator deals with finalising the affairs of the company and once fully wound-up convenes a final meeting of the members and files the requisite filing returns in the Companies Registration Office (CRO).

The company is deemed to be dissolved after three months following the registration of the final return to the CRO. The time limit for restoration of a company to the Register of Companies following the completion of a member’s voluntary liquidation is normally two years.

This is the proper way to do it but in thousands of cases every year, directors bury their heads in the sand when it comes to their compliance requirements. The CRO maintains that there has been a big improvement in recent years with compliance rates of 90 per cent now, compared to just 30 per cent a few years ago. Failure to file an annual return results in penalties that rise on a daily basis up to a maximum of €1,200.

Strike-off has enormous consequences. Legally, the business cannot trade or operate a bank account, so it can result in lines of credit being extinguished. A list of struck-off firms is also forwarded to the Director of Corporate Enforcement.

Almost by definition, an involuntarily struck off company has breached some aspect of company law. Failure to keep proper books of accounts is a very common breach, according to Brian Prendergast, corporate compliance manager of the ODCR.

Other common breaches include directors borrowing above the legally permitted limit of 10 per cent of the net assets of the firm or borrowing from one company to another where no parent company owns both. The ODCR has extensive powers to investigate and if necessary prosecute directors of firms for a range of such non-compliances.

Prendergast says that is now a large onus of legal responsibility on auditors to report issues of non-compliance and that his office receives approximately 250 reports from auditors every year. Apart from the de-registering of companies, another step that companies can take to reduce their reporting requirements and costs includes applying for audit exemption. This is an option for firms whose turnover is less than €7.3 million, who have total assets not exceeding €3.65 million and who employ less than 50 people.

The company is still required to file financial statements such as a balance sheet and profit and loss account. Around a quarter of Irish companies now avail of this option.

While this does result in lower bills from accountants, Prendergast says it can be a mixed blessing. “There is a value in directors meeting with an auditor at least once a year as it’s an opportunity for the auditor to check other compliance issues. Many directors may be unaware of their responsibilities. Audit exemption may be a valid decision but it needs to be an informed one,” he notes.

Companies with shrinking turnover might also consider the option of removing themselves from the VAT system, especially if they are not making many VAT purchases that they can reclaim and are effectively acting as unpaid tax collectors.

This can further reduce accounting and administration time and if turnover is sufficiently low – €75,000 for goods and €37,500 for services – it can be organised relatively easily with Revenue if your existing returns are up to date.

However, cash-strapped businesses might need to think carefully about this. Those operating on a cash-received basis effectively get up to four months free cash flow on their receipts before they need to pass them on. A business that gets paid on an invoice in early January for example, doesn’t have to pass on the VAT element of the payment until May by which time they are in receipt of monies that they don’t need to pass on until September.