It was recently alleged that a PPE manufacturer has sought to mask its earnings by converting into an unlimited company. As an unlimited company, unless one or more limited exceptions apply, there is no requirement to deliver accounts to Companies House (though a confirmation statement must be filed), and they are not subject to the same restrictions as limited companies on the reduction of capital.
There are obvious advantages to this reduced disclosure requirement: dividends can be kept private; the financial affairs of a business can be kept hidden from competitors; and there may be a boost to creditor confidence on the basis that as shareholders share the responsibilities of the company's assets they are more likely to act prudently.
However, it is for that last advantage that very careful consideration should be given to using an unlimited company. As the name suggests, members' liability is unlimited – indeed there is no limit on the liability of present members, or past members (subject to certain limitations).
The few companies profiting from the pandemic may well consider that the benefits of converting to an unlimited company outweigh the risks – but most businesses, navigating the challenges of the pandemic, would be wise to stick with the protections afforded by limited liability.
Unlimited companies are rare in the UK for a reason, and it is worth noting that only 3,353 of the companies registered at Companies House in 2019-2020 (of a total 3,788,130) are unlimited.
What is an unlimited company?
An unlimited company is a company with no limit on the liability of its members (Section 3(4) Companies Act 2006).
What are the benefits?
The unlimited nature of the members' liability means the company is not subject to the same level of financial disclosure. Unlimited companies benefit from an exception to deliver accounts and reports to the Registrar of Companies if certain conditions are met (Section 448 Companies Act 2006). They also enjoy much greater flexibility in relation to reductions of capital, redemptions and purchases of their own shares (Section 556 Companies Act 2006).
From a commercial perspective, as shareholders are personally exposed to financial risk, it may have the effect of encouraging careful risk management, and increasing trust and confidence of creditors.
What are the disadvantages?
Unlimited liability for members past and present. If an unlimited company fails to discharge its debts, creditors can petition for the company to be wound up and the members, current and historic, will be liable to contribute to its assets to the extent sufficient for the payment of its debts and liabilities and the expenses of the winding up (Section 74(1) Insolvency Act 1986). Creditors may be less inclined to extend credit in circumstances where the financial position of the company is unknown.