Companies without share capital present a risk because they
can be used to break a chain of ownership. Companies without share
capital can be incorporated within otherwise normal group
structures.
The problem is illustrated by the following example.
Example
In this example B Co is a company limited by guarantee. It has
no share capital. It holds 100% of the shares in A Ltd, the lessor
company. It is not a subsidiary of C Ltd because C Ltd holds no
shares in B Co.
Commercially, the relationship between C Ltd and B Co will
ensure that C Ltd controls B Co – otherwise D Ltd’s
group would lose any profits from A and B. In this example it is
assumed that C Ltd holds all the voting rights in B Co and is
entitled to all of the distributable profits and the assets on a
winding up.
Without special rules B Co is the principal company in
relation to A Ltd. The 75% chain cannot continue above B Co.
The sale of B Co would not trigger a charge because there is
no change in the relationship between B Co and A Ltd.
The special rules for companies with no share capital change
this outcome where there is control for the purposes of section 840
ICTA 1988.
If, in this example, C Ltd holds all the voting rights in B
Co and is entitled to all of the distributable profits and the
assets on a winding up B Co is treated as a 75% subsidiary of C Ltd
and the chain continues up to D Ltd which is now the principal
company in relation to A Ltd.
With this adjustment the sale of B Co becomes a relevant
change in the relationship between A Ltd and its principal company,
D Ltd.
