Category: Commercial Law

When setting up or restructuring as a charity or not for profit organisation (NFP) you will need to consider which legal structure is right for you. There are a number of different legal structures for charities and the main ones are listed below:

• Charitable company
• Charitable incorporated organisation (CIO)
• Charitable trust
• Unincorporated charitable association

The most commonly adopted legal structure for charities and NFP’s is the charitable company structure, formally referred to as a private company limited by guarantee, adopted by the likes of Macmillan, Cancer Research UK and the British Heat Foundation. Essentially, a charitable company acts as the legal wrapper around a charity and this articles provides key insight and guides you through the steps to take in order to set up a company limited by guarantee. Whilst this is a relatively straightforward process there are pitfalls to be aware of, where you may need legal advice.

Firstly, what is a private limited company?

A private limited company is a legal entity, owned by its ‘members’ whose liability is limited to the money they initially invest in the business.

What are the key features of a company “limited by guarantee”?

A company limited by guarantee does not have shareholders or a share capital, instead ownership and control rests with its members who are guarantors up to a ‘guaranteed amount’. As there are no shareholders there is also no need to transfer shares every time a membership is transferred. This type of structure is facilitative of not for profit status because typically profits are not distributed to its members, instead profits are reinvested back into the business for its charitable purpose.

The ‘guaranteed amount’ is the agreed amount of money the guarantors (or subscribers) promise to pay the company if it is unable to pay its debts. The guarantors must pay the company the full amount of their guarantee and this payment covers the guarantors for situations such as the company being closed down. The guaranteed amount is not linked to how much the company is worth – you choose how much they pay!

What are the key benefits?

The key benefits of adopting a company limited by guarantee structure are as follows:

• The company can enter into contracts, employ staff and own assets (amongst other things) in its own name.
• The members can set low limits on their personal liability.
• The company is responsible for its own finances: This means members are not responsible for company debts.
• The company has to act in line with its own internal rules which are set out in  its  ‘articles of association’.

How to set up a company limited by guarantee?

You can apply to set up a company limited by guarantee:

(a) Online at Companies House;

(b) Online through an Incorporation Agency; or

(c) By post at Companies House.

Apply online through Companies House

It usually takes between 24 – 48 hours for your application to be processed. The application fee is £50.

Using this method:

• Your company can only use the model articles which may not be appropriate for your needs.
• Your company may have a maximum of 5 officers (directors and secretaries). You can appoint more in the future, if required.
• You cannot apply online if:

o A parent company will control the new company.

o The new company will be taking over another charity.

o Any of the subscribing members will be a ‘corporate body’ (i.e. another limited company or a limited liability partnership).

If you have used this method of incorporation we can help you make any changes required to the model articles to meet the needs of the charity including its aims and its objectives.

Apply online through an Incorporation Agency

You can apply to set up a company limited by guarantee online via an Incorporation Agency. The fee depends on the agency and most will offer a same day service.

Applying this way offers more flexibility when setting up because:

• You can choose bespoke articles which have been tailored to your specific requirements, to include the aims and objectives of the charity.
• You can appoint any number of officers (directors and secretaries).
• Both individuals and corporate bodies may be subscribing members.

Apply by post to Companies House

You can submit an application by post – the fee is £71 and can take up to 14 days depending on timescales. This method offers full flexibility to incorporate a charitable company in the manner you require but most people require a more prompt incorporation.

Steps to take when setting up a company limited by guarantee

Steps to take when setting up your company include:

• Make sure setting up a company limited by guarantee is right for you, and ensure the articles of association are appropriate for the type of company, its aims and its objectives.
• Choose a suitable company name, taking care if similar and existing charities have similar names and avoid names consisting of sensitive or restricted words.
• Decide on a registered office address for the company but bear in mind this information will be available to the public.
• Decide on the Standard Industrial Classification (SIC) code that applies.
• Individual directors and company secretaries must be over 16 years and lawfully able to be appointed, this means you cannot appoint an undischarged bankrupt or someone who has been otherwise disqualified and they must willingly consent to be appointed as your company director.

What happens after a company limited by guarantee is set up?

• Once the company is incorporated, the company name, address and company registration number should be clearly displayed on all official company paperwork, (including your website if you have one).
• You must display a sign showing your company name at your registered company address and wherever your charitable company operates but if you are running it from home you do not need to display a sign.
• Companies House will send an authentication code to the registered office after incorporation which will allow you to register for online filing.

Important things to note

• A charitable company only obtains ‘charitable status’ once it is registered with the Charity Commission.
• A charitable company is dual registered at Companies House and the Charity Commission, and therefore you must comply with dual filing requirements.
• Each year the company must file annual accounts and a confirmation statement at Companies House, failure to comply with these filings can result in a fine or the company being struck off the register.
• The responsibilities and duties of a director are important and failure to comply with statutory duties can result in a fine and/or imprisonment. You can find more information online at gov.uk.

Legal advice for setting up a company

If you are considering setting up a charitable company, a corporate lawyer can help you through the process. A solicitor can provide advice on the company’s legal structure, prepare bespoke articles of association, and ensure your application is submitted properly. If you need other legal support in setting up your company, please do not hesitate to contact our Corporate and Commercial Team.

 

Pink Floyd guitarist David Gilmour recently hit the headlines for not being able to sell a £10 million seafront mansion (‘The Property’) because it turns out that he doesn’t actually own it.

In short, Gilmour did not purchase the Property himself; instead, he purchased it in 2011 through his former company, Hoveco Limited. Then, in 2014, Hoveco was dissolved, and a subsequent administrative error meant that the Property was not transferred into Gilmour’s ownership and, as a result, has drawn attention to the phenomenon known as ‘bona vacantia’ (ownerless goods).

This article will explore the voluntary strike off procedure that can be used to dissolve a company before explaining what happens when company property is not identified and transferred prior to a company’s dissolution.

The voluntary strike off procedure

The voluntary strike off procedure allows for companies to be dissolved voluntarily and to cease to exist as legal entities. Various scenarios can lead to a voluntary strike off including company reorganisations, business and asset transfers and scenarios where a company was set up for a purpose that is no longer needed. Once struck off, the company will be dissolved and will cease to be a legal entity.

The directors (or a majority of them) make the application to strike off a company on the company’s behalf. They are then obligated to notify the members, any directors who did not make the application, creditors or prospective creditors and employees of the application.

It should be noted that an application to strike a company cannot be made if in the previous three months, the company has carried out certain activities, including changing its name, trading, disposing of property or rights for value or engaging in activities other than ones necessary for making the striking off application. An application also cannot be made where a company is subject to certain insolvency proceedings, so seeking legal advice before proceeding with a dissolution is essential.

Property of a dissolved company

Once dissolved, the company no longer exists as a legal entity, and therefore, it can no longer own property. This means that any property owned by the dissolved company will pass to the Crown (or the Duchies of Lancaster or Cornwall) and become bona vacantia. Nearly all types of property can become bona vacantia, including:

• land and interests in land;
• cash, including bank accounts and insurance policies;
• intellectual property; and
• the benefit of assets, agreements and mortgages.

There are two situations where the property owned by a dissolved company cannot become bona vacant. The first is where the dissolved company owns property on trust for third parties. The second is where the dissolved company owns property overseas, as this property will likely be subject to the law of the jurisdiction of where it is located. As a result, it may be necessary to restore the company so that the property can be disposed of in accordance with the relevant local law.

The Crown (acting through the Treasury Solicitor) can disclaim their title to bona vacantia if the Crown decides not to keep or sell the property. Similarly, if there is a risk or liability associated with ownership of the property (such as a tenancy of a commercial lease, contaminated land, property subject to security or to competing claims). Where the disclaimed property is freehold land, the freehold title to that property will be extinguished.

The property will then escheat (revert) to the Crown Estate (the statutory corporation that administers the monarch’s land) so that freehold land is never without an owner. The Crown Estate cannot take any action that would be construed as management, possession or ownership of the property, as to do so could render the Crown Estate responsible any liabilities arising from the property.

There are several situations where company property may become bona vacantia, for example, when Hoveco was dissolved, an inadvertent oversight meant that the Property was not disposed of and therefore became bona vacantia. Other scenarios include liquidators failing to dispose of assets that were not known about or disclaiming onerous property (such as unprofitable contracts or unsellable property) under the Insolvency Act.

Recovering bona vacantia

There are several ways to recover bona vacantia:

Restoration of a dissolved company

Under the Companies Act, a restored company is treated as never having been dissolved, hence any property that had become bona vacantia on the dissolution of the company will automatically revert to the company’s ownership.

However, this may not be possible where the Crown has sold the property. In these cases, the Crown will pay the company the amount of any consideration it received from the disposal of the property or an amount equal to the value of the property if no consideration was received.

The court also has the power to restore the company to the position it would have been in had the company not been dissolved.

Vesting orders

This is the approach that Gilmour is understood to have adopted in relation to the Property. Parties can apply for a vesting order under one of:

• the Companies Act in relation to property disclaimed by the Crown.

Applications made under the Companies Act can only be made by parties who can claim an interest in the property such as creditors, tenants and parties who had paid to purchase the property.

• the Insolvency Act in relation to property disclaimed by a liquidator;

Applications made under the Insolvency Act must be made within three months orf earlier of the applicant becoming aware of the disclaimer or of the applicant receiving a copy of the liquidator’s disclaimer.

• the Law of Property Act 1925 in relation to escheat property;

Under the Law of Property Act, the court can order the creation of a corresponding freehold title to the one that was extinguished through escheat. This requires the applicant to have held a legal right to the property. There is no time limit on an application under the Law of Property Act.

• the Trustee Act 1925 in relation to property held by a corporate trustee.

Where property becomes bona vacantia following the dissolution of a corporate trustee, the court can vest the dissolved trustee’s interest in a new trustee. Alternatively, in the case of joint trustees, the court also has the power to vest the dissolved trustee’s interest in the joint trustee.

Discretionary grants

Where a company was solvent on its dissolution and where it would be impossible or cost-prohibitive to restore a company, the Crown can exercise its discretion to make payments to former shareholders as owners of the company. It is important to note that a director cannot make any application for a discretionary grant unless they are a shareholder as well. Conversely, where the company was insolvent, this discretion extends to the liquidators and administrators of the dissolved company.

This power is limited to the payment of cash received by the Crown from the disposal of bona vacantia and the grant is subject to a maximum limit of £3000 and, where it would be possible to restore a company, the applicant will be forced to undertake to not restore the company in the future.

Purchasing Escheat

The Crown Estate has greater powers over the land acquired through escheat and is not subject to a deadline to sell the freehold land. However, as the Crown Estate cannot undertake acts of management, it can only sell the whole of the property. Assuming that the purchaser is an “appropriate person or body” and that the sale is in the public interest, the Crown Estate will sell with a view to its legal requirement to obtain the best consideration for the property. Any transaction will also require the purchaser to make a contribution to the Crown Estate’s legal fees.

Purchasing from the Crown

The Crown has three years to disclaim their title to any bona vacantia. This period runs from either the date that the Crown was notified of the bona vacantia or from the date that the Crown established the ownership of the property. Should the Crown decide not to disclaim their title, they will seek to sell the property for full market value within these three years.

---

As such, there are numerous considerations that business owners and directors should be aware of when dissolving a company. Identifying and correctly disposing of a company’s assets can prevent business owners from the expense, complexity and delays of dealing with bona vacantia.

The multidisciplinary approach adopted by Tees’ Corporate & Commercial, Litigation and Commercial Property teams means we are always ready to assist both with the dissolution of a company or with retrieving bona vacantia.

Selling a business can be complex, and often, business owners do not know how to prepare. Early preparation can be key to enabling a business sale to run smoothly. In particular, it can greatly assist the due diligence process.

Valuation

One of the first things prospective sellers should do is approach a specialist business valuer. A good idea of the company’s (‘Target’) value will assist in early negotiations regarding the sale price with the buyer. It may influence key aspects of the deal, such as whether deferred consideration is necessary from the buyer’s perspective. A business valuer will assist in ensuring that the price is realistic given the market conditions, and they will also help you to understand the risks associated with different valuations.

Tax

It is essential that sellers are informed on the tax position of the Target, as well as their own personal tax position. Certain tax reliefs may be available on the sale, such as Business Asset Disposal Relief (if the seller is an individual) or Substantial Shareholding Exemption (if the seller is a company). A tax specialist will explain how the tax will work on completion and whether any reliefs may be available to you.

Corporate Documents

In Tees’s experience, it is common for sellers not to have or not know where Target’s corporate documents are. It will be of significant benefit to the efficiency of the sale if these are obtained before the transaction gets started; the buyer’s solicitor will almost certainly request these documents as part of the due diligence process, and not having the papers can create a bad impression as to how the Target has been operated. Key documents that the buyer will likely request are:

• The Target’s statutory registers including:
  • Register of Members: this is essential as it shows who the legal owners of the shares are (until the shareholders are placed on the register of members, they are not legal owners of the shares and will not have legal title to sell them to the buyer).
  • Register of Persons with Significant Control
  • Register of Directors and their addresses
  • Register of Secretaries and their addresses
  • Register of Allotments
  • Registers of Transfers
• The Target’s minute books and key shareholder resolutions
• Certificate of Incorporation
• Articles of Association
• Memorandum of Association
• Records of any changes to the Target’s name
• Evidence that any charges or debentures have been released
• The corporate structure of the Target, including the shareholdings, and whether there are any holding companies or subsidiaries.
• Copies of any existing Shareholders’ Agreement

Companies should have records of at least some of the above, and collating these early in the sale process will help the buyer’s due diligence get off to a good start. In addition, sellers should review Companies House and ensure all filings are current. If they are not, the seller is technically in breach of its statutory obligations, and the buyer will ask for this to be rectified before completion.

Employment Issues

Another aspect that sellers can prepare early is an anonymised list of all employees in the business, their date of birth, job roles, salary, benefits (including details of any pension scheme), and whether there are or have been any employee disputes or grievances. The buyer will ideally want copies of all employment contracts or a template employment contract if these are the same for all employees.

It would also be useful for the buyer to know whether any employees do not plan to continue working for the Target, and any implications this will have on running the Target post-completion.

Commercial Contracts

We often find sellers do not have records of their key contracts with suppliers and customers. Often, in due diligence, buyers ask for copies of agreements with Target’s top 10 suppliers and top 10 customers. Preferably, the Target will have written agreements with these companies to outline how the relationships work practically and help to minimise the risk of disputes.

A review of the contracts that the Target has in place would be a useful exercise for a corporate seller. If there is no written contract, we would advise getting one in place. All contracts should be collated to provide these to the buyer quickly.

Litigation

The buyer will inevitably need to know about any litigation that is taking place and what stage it is at. They will request copies of any agreements reached or offers made, as well as copies of all correspondence with the other party or their advisor. Sellers must give an honest account of any ongoing disputes.

The buyer will want to consider its potential liability surrounding any dispute. Sellers may be able to consider settlement with the disputing party. Buyers may want to put indemnities in place to cover any related claims post- completion.

Property

Sellers should review the Target’s property portfolio and collate all documentation relating to any properties owned or leased, as well as any licences, permits or other rights relating to the properties. Often sellers do not have these documents to hand, which can slow down the due diligence process, as it can take time to retrieve property documents from the Land Registry, Councils or other authorities.

Intellectual Property (IP)

Similarly, IP is another asset that may be included in the sale, and the buyer will want to know about all trademarks, patents, and design rights. It is good practice for a seller to organise this information into a schedule, including all registration numbers, renewal dates and the IP owner. If the owner is another company within Target’s group, the ownership of the IP may need to move to Target. It is advisable that the seller take tax advice at this event.

Summary

Early preparation for a sale can be key to its efficiency. Sellers should have early conversations about tax and valuations to assist with early negotiations with potential buyers. Sellers should also collate as much information and documentation about the Target as possible before the due diligence process, as otherwise, there can be a lot of back-and-forth with the buyer submitting additional requests for information, which can delay completion.

If you are a potential seller considering a sale of your business, don’t hesitate to get in touch with our Corporate and Commercial team to discuss how you can prepare and how we may assist you with your transaction.