Company solicitors: compliance: setting up a company: Humphreys

Our company solicitors explain, advise on and document legal compliance and transactions of all kinds in relation to limited companies including:

Annual compliance obligations

There are certain documents that need to be filed with Companies House every year by all companies. Compliance with this obligation needs to be taken seriously. The directors of a company could face criminal sanctions for not submitting the required company information on time and fines are automatically imposed. At the time of writing these fines range from �150 to �1500 for a limited company and �750 to �7500 for a public company, depending on the degree of lateness. Failure to comply can also allow the Registrar to assume that a company has ceased trading, leading to it being struck off the register of companies. All companies have these compliance obligations whether large, small or inactive, though the extent of those obligations does vary. They are set out in the Companies Act 2006 and its accompanying regulations.

All companies are required to submit an annual return at least once every 12 months. The company directors and/or the company secretary are responsible for compliance by delivering the annual return to Companies House within 28 days of the anniversary of the company's annual return date. The return is made in the form AR01 and this form may be accompanied by other information that company law requires to be provided such as details of share transfers that have taken place during the year and terminations or appointments of company directors and company secretaries. A small company which meets the relevant definitions in the Companies Act 2006 and its regulations has less onerous compliance obligations. It can prepare accounts disclosing less information than medium-sized and large companies.

Articles of association
The articles of association are the basis of a company's constitution. They can be thought of as a statutory contract or internal rule book for the shareholders. Every company is required to have them and they are binding on all of its members. They cover matters such as the internal decision making processes within the company by directors in board meetings and shareholders in general meetings. Compliance with them is vital to ensure that decisions are legally enforceable. The intention of the articles should be to help with the smooth running of day-to-day activities of the company.

Members of a company can specify the terms of the articles provided that none of those terms are prohibited by company law. It is wise to consult a legal professional for advice on any proposed bespoke articles before proceeding to ensure compliance with company law and to ensure practicality. The model articles of association are a set of standard articles prescribed by the Companies Act 2006 and its accompanying regulations which apply in whole or in part in default of a company specifying bespoke articles.

Management buy-outs and buy-ins

Management buy-outs or MBOs involve the existing management of a company acquiring a significant part or the whole of the company. Such a transaction will often be funded by a combination of debt finance and outside private equity finance (referred to as a leveraged buy-out). Legally there are many similarities to an ordinary company acquisition though there are certain unique challenges that need to be addressed. Due diligence and the giving of warranties in the sale and purchase agreement will likely differ from the ordinary procedure based on the fact that the buyers of the company (as its managers) know more about its day-to-day affairs than the sellers (as its shareholders). Additional documentation will also need to be prepared to govern the relationship between individual lenders and between lenders and the management of the company.

One or more new companies may be incorporated as part of the transaction to gain advantages in terms of taxation and convenience. It is quite common for the relationship between management and private equity investors to be governed at least in part by the articles of association in a company to which both parties subscribe. An MBO can be an attractive exit plan for outgoing shareholders as it ensures continuity of management and avoids the need to disclose any confidential information to parties outside the company.

Management buy-ins or MBIs involve outside investors buying-out a significant part or the whole of the company and then taking over its management. It typically varies from a private equity driven MBO in that the private equity investors have a much more direct influence on the outcome and realisation of their investment. MBI teams will typically not have the detailed knoweldge of the business that the existing mangement does, but often come with extensive sector experience and therefore the potential to increase profitability in the company and generate good returns for the shareholders. A buy-in management buy-out or BIMBO is a hybrid of an MBO and an MBI and involves a combination of internal and external parties taking over the management of the company after the buy-out.

Corporate insolvency and recovery

Compulsory liquidation involves the court ordered realisation of the assets of an insolvent company, resulting in a dividend paid to its creditors in the statutory order of priority. Winding-up can be ordered when the company is deemed unable to pay its debts within the meaning of the Insolvency Act 1986. Voluntary liquidation can also be started by the members of the company passing a special resolution. Once the process of liquidation is complete the company will be dissolved. Directors of a company that may be facing insolvency need to comply with certain legal duties owed to the company and its creditors. There may also be implications for those directors such as disqualification proceedings and proceedings seeking contributions to the assets of the company should it be liquidated.

There are various formal and informal alternatives to winding up, including administration. Though popularly known as the 'beginning of the end', administration is a rescue procedure, with the intention from the outset being that the company emerge from it as a going concern. The administrator will examine the affairs of the company and determine how best to keep it afloat. They will then take control of the business and seek to implement the rescue plan. Often that plan leads towards the sale of the company to a buyer willing to take it on. This is not to say that administration is never simply delaying the inevitable and indeed liquidation of a company can and does follow on from failed attempts at administration or one or more of its alternatives. The administrator of a company must perform his statutory duties set out in the Insolvency Act 1986, which means achieving one of the following outcomes (in order of priority):

Rescuing the company as a going concern
Achieving a better result for the company's creditors than would be likely on winding up
Realising the assets of the company and distributing the proceeds among its secured or preferential creditors

Other possible alternatives for a company in financial difficulties include negotiation to extend credit repayment periods, outside equity finance, sale of all or part of the business as a going concern, realisation of debts, claims under retention of title clauses, receivership and company voluntary arrangements. Expert professional advice should always be sought on the available options and their likely implications.

Solicitors authorised and regulated by the Solicitors Regulation Authority of England & Wales under no.62944
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