Out-Law Guide | 31 Jan 2014 | 1:47 pm | 4 min. read
Due diligence is an important part of this process. This guide outlines what this involves and includes a free template due diligence questionnaire.
The legal mechanics of removing a company are often straightforward but it is important to follow a structured process for due diligence before removing a company.
The purpose of due diligence in corporate simplification projects is to identify:
Adopting an appropriate due diligence process should reduce the risk of assets or issues being discovered after the event, in which case time and money would need to be spent on restoring the company to the register.
A clear due diligence process is important not just for the commercial reasons set out above. It is also important in order to manage personal liability issues for the directors who will be asked to approve the actions required to remove the relevant companies.
The following table summarises the liability risks for directors associated with the most common procedures from the perspective of English law.
Procedure |
Director involvement
|
Personal duty on the part of directors |
Potential sanction for breach |
Strike off |
Form DS01 to be signed by a majority of directors. Notification to be made, inter alia, to all creditors of the company |
Ongoing duty to notify all creditors, employees, pensions trustees etc. – defence if director proves he “took all reasonable steps to perform the duty” |
Unlimited fine, disqualification from being a director. Up to seven years' imprisonment for aggravated offence. |
Reduction of share capital using the ‘solvency statement’ procedure |
Statement of solvency to be signed by all directors |
Statement of solvency – potential personal liability if made “without reasonable grounds” |
Fine of up to £5,000; up to 12 months' imprisonment; disqualification |
Commencement of Members’ Voluntary Liquidation |
Statement of solvency to be made by a majority of directors |
Statement of solvency – potential personal liability if made “without reasonable grounds” |
Fine of up to £5,000; up to 24 months' imprisonment; disqualification |
By adopting and following a standard approach for due diligence, directors are put in the best position to show that they have taken appropriate steps to satisfy their legal obligations. This means that directors can demonstrate that they have ensured that all reasonable steps have been taken to identify material assets and material liabilities.
A typical due diligence process often follows the following steps:
One of the challenges of corporate simplification projects is that some assets and liabilities may not appear on any given company’s balance sheet, and may also not appear on any public register. Such assets may include:
Where there is considered to be material risk that hidden assets or liabilities may be present, then additional due diligence investigations may be justified. Those investigations may include:
When searches of public registers are carried out it can be useful also to search using former company names, rather than merely the current name. Consideration may also be given to possible typographical errors which may have occurred at the time of the original registration, and carrying out searches using those variants of the name involved. This may be particularly relevant if the company name includes digits which may have been transposed on the original registration.
The due diligence processes for a corporate simplification project should include one or more standard due diligence questionnaires. Clearly, this will need to be adapted to suit the particular circumstances of the group or companies involved. For example, it will need to be adapted to take into account:
Here is an example template due diligence questionnaire for corporate simplification projects.
Corporate simplification projects can seem overwhelming, especially when a number of functions within the organisation need to be involved. It is usually advisable to start with a small batch of companies with relatively simple requirements. This has the advantage of allowing internal processes to be developed – including in relation to due diligence – and also making tangible progress at an early stage.