Overdrawn Directors Loan - Liquidators Leave Door Open?
- Thread starter UK Contractor Accountant
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They don't have to. Going back more years than I care to admit, I used to contact companies with advertised winding up petitions to offer insolvency solutions. Typically (used to be on a Wednesday) you'd see 100 - 150 advertised petitions where HMRC were the petitioning creditor.
A handful of these every week were against dissolved companies. It was not uncommon for HMRC, as a creditor, to simultaneously restore a company and petition for it to be wound up.
I don't follow petition data as much these days, but I'd imagine this is still pretty common. Feel free to trawl through advertised petition data to confirm this.
Naturally once the reinstated company is wound up, the liquidator (usually the OR) can then enforce an overdrawn director loan accounts.
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The simple fact of the matter is that .
Why would the Crown need to litigate a debt owed for such property to belong to it under section 1012?
Have you considered section 1012?
Why would the Crown need to litigate a debt owed for such property to belong to it under section 1012?
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This being said @Gyumri , I take your point. Thousands of companies are dissolved every year, and though legally speaking any undischarged debtors (including overdrawn directors loan account) would legally be considered bona vacantia, the crown does not proactively look to collect.
And more importantly, from a director's personal taxation point of view, this remains a huge grey area.
The point still remains - so long as there's reason and logic (usually to do with further asset realisation and/or investigation matters that have come to light post dissolution) a liquidator can take steps to reinstate a liquidated and dissolved company, back into liquidation.
I'm sure we will all be grateful if you share any response you get back from your queries.
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You are right - it's as @UK Contractor Accountant states: 1029 (2)(j) My apologies for the oversight.
The remaining question is whether debts due to a company are bona vacantia. Rights vested in a company from trademarks, copyright etc do qualify but not as far as I can see debts due to a company which would be set out in a statement of affairs prior to dissolution.
A bank balance however is bona vacantia and I suspect that is either because a liquidator has not claimed it or because banks routinely close accounts upon a winding up order and so the balance becomes "ownerless" on dissolution.
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Why do you think certain classes of assets vest in the crown, duchy or duke on dissolution, and others don't?
You say book debts set out on a statement of affairs would not qualify. Why would assets on a Statement of Affairs affect the operation of Section 1012?
Section 1012 does not appear to discriminate; it says "all property and rights...". The qualification appears confined to assets held on trust for another.
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I've written to the department for clarification as to the status of a debt owed to a company and will provide their response although it is something that anyone here could also ask.
Property such as trademarks, copyrights, freeholds, are rights which are " vested in" a company do qualify and sums of money are listed, but causes of action that provide a company with the right to obtain a remedy from the court (such as to recover an overdrawn DLA, bank balance or other debt) do not seem to amount to bona vacantia.
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I don't mean to constantly disagree with you, but your logic confuses me.
Bank balance is the most practical example of bona vacantia in action - trust me, I have spoken to my fair share of company directors in my years, whose companies were dissolved for non filing, whilst there was still a positive cash balance in the company's bank account - funds that were subsequently passed to the Bona Vacantia office by the bank.
If we can all agree that cash at bank is a company asset that would be subject to bona vacantia, then @eteb3 has summed this up very succinctly:
Again, I accept that in practicality the Bona Vacantia do not call on this, but the logic remains, as does the absolute minefield this creates from a personal tax consideration following a dissolution.
For what it counts, this tax minefield is why a few responsible directors have previously engaged me to carry out a Members Voluntary Liquidation, to close their solvent company, distribute in specie their overdrawn directors loan account, and then claim the distribution as a Capital Gains consideration, and onto Business Asset Disposal Relief in some cases.
(the above does not constitute tax advice and is not suitable for every circumstance!)
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Pretty much. Plus conscious that if they dissolved (no creditors to object) then it's a tax headache.
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I don't disagree that a bank balance or even company money that may still be in a safe is bona vacantia.
The question is whether debts owed to the company such as an overdrawn director's loan are also caught within the definition of bona vacantia?
A bank balance is a debt owed to a company and on the face of it a bank's position is no different from any other debtor - but there are various types of debts to consider: contractual debts; debts due from customers; and debts repayable on demand (as @Elliot Green has mentioned).
If all such debts become bona vacantia then it would have been easy for parliament to have said so, rather than state "property and rights vested in a company".
I would also have expected a duty to be imposed on a liquidator to inform the department of such outstanding debts!
A debt may give rise to a cause of action whereby a right to claim a liquidated sum can be established by a court - but a debt per se does not amount to a "right vested in a company".
If you write to the bona vacantia office as I have done you might get a definitive answer quicker then me.
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The definition of property under the IA86 does not just mean physical property.
HMRC have only recently started becoming interested about how liquidators treat uncollected elements of o/d DLAs. No doubt they will bring in more rules and law to cover this in future but for not they are merely asking us to report such 'write offs'.
HMRC have only recently started becoming interested about how liquidators treat uncollected elements of o/d DLAs. No doubt they will bring in more rules and law to cover this in future but for not they are merely asking us to report such 'write offs'.
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“Vested in” is in opposition to “or held on trust for”; it doesn’t add anything else. It just means “held by the company in the company’s own name”
“Owned by” would be ambiguous. The phrasing makes clear that legal and equitable ownership both go as bona vacantia. But it doesn’t mean anything more than “owned by (and that means owned any way things can be owned)”.
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This is not an uncommon way for legislation to be drafted. Perhaps have a look at Sections 283 and 306 of the Insolvency Act 1986.
There's no duty on a Liquidator to volunteer any information directly to the Government Legal Department about unrealised assets.
On what basis do you say a debt is not a right vested in a company?
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The issue at present is that debts are assets of a company, but are they capable of being classed as bona vacantia such that they can belong to the Crown on the dissolution of a company?
A company or liquidator has the right to sue for the recovery of a debt - such as the money in a bank account - and that right can be assigned - but it is only a right to seek a remedy from the court. The debt itself - just like a bank balance - is not a right vested in the company and nor is it property at the time of dissolution and therefore the debt itself cannot be regarded as bona vacantia.
If debts can be passed to the Crown on dissolution of a company then it must become a creditor. There can't be a debtor without a creditor.
But I just don't see any case where a person who has owed money to a company that has since been dissolved is then said to owe that debt to the Crown!
When a company is dissolved a bank may pay over any account balance remaining to the crown, because there is no owner of the funds and not because debts are passed to the crown.
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Ok this will be my last in this and then we’ll agree to differ! And I look forward to our total vindication when GLD gets back to you on your email 
The nub of all this is your insistence that a bank balance is somehow different from any other debt, and something other than a chose in action. But it ain’t.
The right merely to petition the court for payment of the debt is a right all the same, and by s1012 must therefore pass to the Crown.
For practical purposes, yes. But law deals in theory, too. (I even wonder if there may be a bar on enforcement of the debt post dissolution, as there is ahen an individual becomes bankrupt - but that’s another matter.)
There are no “funds” in the sense you mean (real property capable of possession). The money - all money, since the death of the gold standard - is nothing more than a debt. A lowly, mean accounting entry, ultimately enjoyable only by going to court.
The nub of all this is your insistence that a bank balance is somehow different from any other debt, and something other than a chose in action. But it ain’t.
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I agree but a debt per se is not a "right" vested in a company and therefore debts - such as a bank balance in credit - are not themselves "bona vacantia" (unless the account in the name of the company has not been closed in which case there is a certain sum "vested" in the name of the company).
The legal meaning of the word vested is that the vestee needs to take no other steps to prove title to an asset.
I suspect that is one reason why the section does not simply refer to the "assets" of a company becoming bona vacantia, because although debts and goodwill etc may appear in the accounts as a value, no legal basis exists for saying that they have been vested as a legal right.
In other words, the mere fact that my company has put you down as a debtor for £1m does not thereby mean that my company has a "right" against you which can then be regarded as bona vacantia on dissolution!
I agree of course that a bank balance is the same as any other creditor - debtor relationship, but if the company or a person "dies" then the funds which were formally held in the name of the deceased/dissolved become ownerless and hence bona vacantia for that reason.
I am not sure at present if that has anything to do with the fact that the bank balance also represented a debt due to the deceased.
You can also write to the department for clarification!
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Potier v Solicitor for the Affairs of Her Majesty's Treasury Crown Nominee for Bona Vacantia [2021] EWHC 1524 (Ch)
"... the property of a company that is dissolved is deemed to be bona vacantia unless the property is held by the company on trust for another person. The Crown does not take any step or to assert a claim to make the property bona vacantia. It becomes bona vacantia automatically, unless it is subject to a trust.
... Section 654 does not require the Crown to do anything or place any obligations upon it to search out property that may be bona vacantia. Property is simply deemed to be bona vacantia as a matter of legal convenience."
"... the property of a company that is dissolved is deemed to be bona vacantia unless the property is held by the company on trust for another person. The Crown does not take any step or to assert a claim to make the property bona vacantia. It becomes bona vacantia automatically, unless it is subject to a trust.
... Section 654 does not require the Crown to do anything or place any obligations upon it to search out property that may be bona vacantia. Property is simply deemed to be bona vacantia as a matter of legal convenience."
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They become ownerless in law, because the legal owner is dead. They are then held on trust by the executors (who are trustees) for those named in the will; or if there's no will they are subject to a trust without trustees, so the court is asked to appoint some (called administrators).
But if there's no will, and also no one alive who inherits under the intestacy rules, there can be no beneficiary; so there's no trust; so the assets can't be owned beneficially. As the person in whom the estate was legally vested is no more, the assets aren't owned legally, either. Therefore they are (otherwise) ownerless, and belong to the Crown.
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This is not in issue. What is in issue is whether "property" or "any rights whatsoever vested" in the dissolved company embraces sums owed by debtors.
The section deliberately avoids using the word "assets" of a dissolved company which would necessarily embrace its book debts and such things as "goodwill" which is sometimes listed as an asset; likewise potential claims against former directors etc.
Instead the section says "rights vested in a company". The definition of property is given a very wide meaning in the Insolvency Act, but the definition is unfortunately not carried across to the Companies Act, which ironically includes no definition for the meaning of "property", but speaks only of "non-cash" assets for a different purpose at s1163.
A debt per se is not a "right vested in a company" and nor is it "property" which is why I believe book debts are excluded from being regarded as bona vacantia.
I have already written to the BV department to see what they have to say.
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To my mind it is not in doubt that book debts are rights vested in a company and or a form of property. Therefore it is my position they are within the scope of Section 1012. However, let's say I am wrong and your rationale is correct, if book debts are not a right vested in the company, then who has the right to prosecute the book debt claims in view of privity of contract?
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As I mentioned above, I could put you down as a debtor in my company's accounts - let's say Alice in Wonderland Ltd. Rightly or wrongly you thereby become a debtor of the company. You may say that you never had anything to do with building the rabbit hole, but yet you have become a debtor of the company and it's recorded at Companies House that Mr Elliot Green owes the company £1m.
Is that "debt" property, or a right vested in the company? If it is a right, what type of right and who has vested it in the name of the company?
You may say that it is the right to sue for the debt, as in the case of a bank balance, which is also a book debt.
These questions may indicate why book debts of a company are not bona vacantia.
I cannot see how privity of contract has any relevance, but if the section embraces book debts, then even where privity of contact may apply as between the company and its debtors, that would not prevent the Crown from claiming book debts.
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I take Elliott’s question to be, if the debt isn’t a right vested in the company (and therefore doesn’t fall within the assets defined s1012 as you suggest), then in whom *is* the right vested? Who can take action on it? It’s a thought experiment to point out that the right to repayment must, after all, vest in the company, and no one else, and so must pass as bv.
I suspect you may have too active an understanding of vesting. A right vests in the company just as soon as the company has that right: no one has to do anything to transfer it into the company’s name. I guess you could say the answer to your question is “the debtor”, but that would somewhat strain the words.
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But the company has been dissolved! No claim of false accounting can be made unless it is restored. Perhaps that is an extreme example, but there must be many book debts which are open to challenge by debtors on a closer inspection. That may be one of several reasons why a liquidator cannot recover all the debts of a company before a company is dissolved. Simply because a debt is recorded in the books of a company does not give a company any "right" to the debt such that the assumed right can become bona vacantia, although the debt may well show up in the books of the debtor.
At the point of dissolution it is my humble opinion that a debtor is entitled to cancel the corresponding debt in its books because the creditor company has been dissolved. Nowhere does it say that such debts must continue to subsist in the debtor's books or innure to the benefit of the Crown such that the Crown then becomes the creditor in place of the dissolved company.
In the context of the Quillan's case before the FTT tribunal, the question is whether debts are automatically extinguished on dissolution despite what the liquidator has said in his case that the overdrawn DLA was not written off.
HMRC's position will be on appeal that the debts of a dissolved company are written off automatically (ie., debts are not property that passes to the Crown).
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The mere recording of a book debt in the records of a company gives no legal right whatsoever to the actual debt.
A debt is not a right in itself but may give rise to a cause of action which can result in a "right" being vested in the name of the company to recover the debt following a judgment
Well have to wait and see - perhaps if somebody has time they could call the BV office and establish whether the debts of a company are considered to be property or rights vested in the name of a dissolved company.
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"A debt is not a right in itself" - What is the basis in law of that statement?
Have you considered the distinction between rights in personam and the discrete matter of the *enforcement* of rights?
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I entirely agree, so I apologise for my hyperbole in #60. Accounts are posterior to law: if there is no legal possibility of recovery, the debt won’t appear in the accounts.
Exactly. The obligation and the right of enforcement are separate matters in common law jurisdictions. This is made plain by the fact that the 6-year bar on civil claims is a bar on the action, it doesn’t extinguish the obligation. That makes a difference legally, but none whatsoever for accounting.
Nobody else thinks there can be any doubt about their answer ;-)
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Section 1012 of the Companies Act 2006 is concerned with either property, or rights of whatever nature "vested" in the name of the company immediately before its dissolution.
Rights are only "vested" in an entity or individual by the operation of law ie., by legislation such as the Land Registration Act; or by the court, pursuant to a court order.
Debts may be assets of a company but they are not "property" and neither are they rights "vested" in the name of a company by any enactment or court.
I may owe you £10 and you may have a common law right to recover that sum upon judgment being granted in your favour; but the £10 is not a right in itself vested in you or anyone.
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You say: "Debts may be assets of a company but they are not "property" ...". You also say: "A debt is not a right in itself".
What is the law that you say supports those assertions? By law I refer to either legislation or case law.
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If I
I’m afraid this is bunk.Useful to have you say it in terms: confirms my thought that your understanding of vesting is too active.
In the first place, “By operation of law” means precisely that there is no need for a court order, registration of title, or the like. Law does it, not judicial power
Second, the common law (by which debts arise) is law, and indeed our primary law. so if you offer to borrow £10 from me at 10% interest, and I accept by handing over the note, the right to repayment vests in me without any further step than the formation of the contract - which is law
Again to restate (a point you haven’t responded to), in s1012 “vested in” is in opposition to “held on trust for”. Between the two of them they are mutually exclusive and collectively exhaustive descriptions of the nature of ownership.
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