Thinking of dissolving a subsidiary company? Know the risks first

If a company has fewer subsidiaries, it can simplify its organisational structure, creating greater efficiency and lower running costs. This also generally creates more straightforward management and strategic decision-making, allowing it to focus on its main business activities and areas of expertise. 

Multiple subsidiaries often create complex legal and regulatory requirements, which can be both costly and time-consuming to manage. By reducing the number of subsidiaries, a company can streamline its compliance obligations and reduce its legal and regulatory risk.

Fewer subsidiaries also tend to improve financial performance due to reduced complexity and costs of managing those subsidiaries. By having fewer subsidiaries, a company may also have a more streamlined business model, which can lead to better profitability and growth opportunities. 

Other reasons can include: the company had never started trading; the company was initially successful but is no longer viable; or the business was set up as a special purpose vehicle that is no longer required 

As with all business decisions, dissolution requires careful consideration of the potential risks involved, which primarily relate to any assets left behind in a dissolved company. 

A company that has been voluntarily dissolved can only be reinstated to the register of companies by a court order. This is an expensive and lengthy process, but it is the only way to recover any assets left behind and prevent them from going ‘bona vacantia’ – to the crown. And it’s worth noting: a company that has been dissolved for more than six years cannot be restored to the Companies House register (unless it’s for personal injury litigation). 

There are also particular considerations for housing associations. In addition to reviewing of contracts, financial arrangements, property and any tax losses that you want to use, housing associations must check to see if there are grants in the company. If there are, you may need to request consent to transfer. If a transfer of property is involved, then consultation with tenants will need to be factored in, and it is important to consider whether a proposed dissolution will trigger any breaches under the existing facility agreements. 

“In addition to reviewing of contracts, financial arrangements, property and any tax losses that you want to use, housing associations must check to see if there are grants in the company”

More generally, all companies need to be aware of the costs involved, such as severance payments, legal and accounting fees, and the financial implications of transferring assets and liabilities. Any write-downs or impairment of assets will also have a financial impact. 

Overall, companies should ensure that the decision to dissolve a subsidiary is soundly based for their overall strategy and reputation. While there are upsides to dissolution, there can also be downsides if the market interprets it as a negative or abruptly made decision. Alternative options that could achieve the same goals should be given due consideration to ensure there aren’t any unintended consequences. 

Helen Curtis, partner, Devonshires