Both processes achieve broadly the same result in that the company’s surplus funds are transferred to the shareholders and then it is dissolved. However, the liquidation option is often more expensive. On the other hand, if a company is simply dissolved, without first being placed into liquidation, there are provisions on the statute that leave directors potentially exposed to actions for a period of up to twenty years from the date of dissolution.

There is also a further, little known potential downside to following the dissolution process.

Company legislation provides for share capital of a company to be “maintained”. It is therefore not refundable to the shareholders except where the court approves a return of capital, where the company is put into liquidation or where the company redeems or purchases its own shares. Any other return of capital is an unauthorised distribution.

If there is an unauthorised distribution, the company has a right to recover the money from its members. If the company is subsequently dissolved, that right passes to the Crown as

bona vacantia “ownerless goods”. The Crown, through the Treasury Solicitor, would therefore be entitled to recover the distribution from the members, although as a policy, that department will not seek to recover distributions of less than £4,000.

The Companies act 2006 provides an alternative, which came into effect on 1 October 2008. This allows a private company to reduce its share capital, without the need to obtain the approval of the court. The procedure is relatively straight forward and requires the directors to file a statement of solvency, together with a special resolution with the Registrar of Companies. Whilst the primary legislation states that any reserve arising from a reduction of a company’s share capital is not distributable, secondary legislation allows the reserve to be treated as a realised profit, which is distributable.

To avoid the bona vacantia trap, it seems the only options are to legally reduce the share capital or to liquidate the company. The choice between which of those courses to follow would appear to rest on the perceived exposure of the directors to potential actions over the next twenty years.