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  • Overview

    Incorporating a holding company above your trading company may enable you to protect your profits from creditors. This article explains how.

    It makes good business sense for a trading company to build up a healthy buffer of accumulated profits, rather than pay all profits out each year as dividends.

    However, we have seen too many examples of the knock-on effects of economic hardship rippling through the supply chain. A client may have a completely sound business, but it only takes one large customer to go pop and the client suddenly finds itself drawn into the fire.

    All too quickly, for reasons which may not be of the client’s making, insolvency looms and the fruits of the client’s labours are being picked off by its creditors.

    There are many ways to mitigate the risk of this happening, such as more stringent credit terms, better credit control and periodic vetting of customers.

    Much more basic than these steps, however, is to undergo a simple corporate restructure by inserting a new holding company above the existing trading company. At the end of each year, the trading company can dividend up to the holding company its profits, either by paying cash or transferring valuable fixed assets (such as property or plant and machinery).

    The dividended cash and the fixed assets are therefore ring-fenced in the holding company and are protected from the trading company’s creditors, if the trading company subsequently encounters difficulties and is forced into insolvency.

    The trading company will only be able to dividend up the amount of its distributable profits and the directors must satisfy themselves that the dividend will not affect the company’s ability to pay its actual and contingent liabilities as they fall due.

    The holding company can then declare its own dividends to the shareholders, or simply hold on to the cash or assets for future use. Dividends received from a wholly-owned UK-based subsidiary are completely tax free in the hands of the holding company.

    If the trading company subsequently requires additional working capital, it can borrow cash from the holding company. The holding company can even take security from the trading company for this inter-company loan, such as a debenture. Therefore, even if creditors do pursue the trading company through an insolvency procedure, the holding company will rank ahead of them in recovering the amount owed to it under the inter-company loan.

    These arrangements will probably need to be approved by the company’s main bank, who may require separate security from the holding company (if the bank already has security from the trading company).

    Thomson Snell & Passmore have implemented this restructure for a number of clients. We have yet to encounter a reason not to do so. If you would like more information about how we can implement it for your company, please email Nick Gabay  or call him on 01892 701236.

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