Return of capital to contributories or surplus to bankrupt 

May 2010

Part 8 Return of capital to contributories or surplus to bankrupt  

Section 1 -  Return of capital to the contributories of a company


36A.132 Surplus assets - distribution to members 

Any surplus of funds remaining after satisfaction in full of all the liabilities mentioned at Part 5 is distributable to the members of the company according to their rights and interests [note 1].  Where the liquidator intends to apply to the court for an order authorising a return of capital, the application should  be accompanied by a list of the persons to whom the return is to be made which must include any necessary alterations to take account of matters after settlement of the list and the amount to be paid to each person. Where the court makes an order authorising the return, it shall send a sealed copy to the liquidator [note 2].


36A.133 Distribution process - checks to be made

The official receiver should check the following before making a distribution to contributories:

a) Check that all other distributions required including the payment of contractual or statutory interest and postponed creditors have been made as appropriate.

b) Check for any resolutions under section 247 of the Companies Act 2006 (CA2006) making payment of any surplus payable to the employees rather than the contributories (paragraph 36A.142).

c) Once it has been established that there is a surplus due for return to the contributories of the company, check with HM Revenue and Customs (HMRC) whether there is any liability to taxation on the proposed distribution. Matters affecting the level of tax due could include; any income earned by the company during its liquidation, (including interest earned on the funds deposited in the ISA); any capital gains tax accrued on the disposal of an asset in the liquidation and; any liability to tax on the return of the surplus to the contributories (see also Chapter 77 paragraphs 77.14 and 77.15, 77.54 and Chapter 39

d) The list of contributories and their claims must be settled [note 3] (see paragraphs 36A.132 and 36A.134). The company’s statutory records, namely the register of members, may be required in order to verify the individual entitlements of the members.  Where different classes of shares exist, it may also be necessary to refer to the company’s articles of association to check whether there are any preference shares authorised by the company’s articles, entitled to take priority over other company shares (including over other preference shares). For further information regarding checking the articles and preference shares and the importance of checking the company’s articles of association see paragraph 36A.141.


36A.134 Distribution process - application to settle the list of contributories

Once the tax position has been resolved and the list of contributories has been settled (see also paragraphs 36A.132 and 36A.133(d)), an application to court should be made, including a summary of the receipts and payments in the liquidation and the settled list of contributories (including details of any disputed contributories to be taken in to account) [note 2]. The contributories should, where appropriate, be included as parties to the application.

The court will “adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it” [note 1].  Where it authorises the return of capital, the court will send a sealed copy of the order to the liquidator [note 4].


36A.135 Distribution process - payment to contributories

Following the procedures outlined at paragraphs 36A.133 and 36A.134 the liquidator will then make the required payments, bearing in mind any requirements to deduct tax prior to distribution as required by HMRC. The liquidator will inform each person to whom a return of capital is made the rate of return and the likelihood of any further return. The payment will be sent by post unless an alternative payment arrangement has been agreed with the payee [note 5].


36A.136 Recovering unpaid share capital following an application to settle the list of contributories

Where the liquidator becomes aware of uncalled share capital in the course of settling the list of contributories, he/she should take the necessary steps to recover the unpaid capital on behalf of creditors.  Shareholders (also called "members" or "contributories") are liable to contribute to the assets of a company limited to the extent of the value of the shares they hold in the company (limited liability). It is possible for a company to issue shares which will be paid for at a later date. This can either be at a date agreed when the shares are issued, by instalment payments on defined dates, or by payment when a call is made on unpaid capital by the company, at the instigation of the directors. The manner in which a call on unpaid capital will be made will be set out in the company's articles of association.

Refer to Chapter 5 paragraph 5.32 for information on the publication of calls on contributories.


36A.137 Interest due on unpaid calls

Under article 15 of Table A where a sum called is not paid on or before the date specified,  the person is due to pay interest on the amount. Under articles 18 and 19 if payment is not made the share(s) may be forfeit. The share is forfeit by resolution of the directors (also in writing).


36A.138 Action following settlement of list of contributories

Following settlement of the list of contributories (the procedure for doing this is set out in rules 4.195 to 4.201 of the IR86 and document production forms are LOCCL, LOCPL and LOCOBJ),  the liquidator requires the leave of the court to make the call on the unpaid sum [note 6]. The costs of settling the list of contributories and making calls should be charged on a time and rate basis and deducted from the estate assets before making any payment to creditors.  The insolvency regulations permit the official receiver, when acting as, liquidator or trustee, to charge remuneration, based on hourly rates, when making a distribution to creditors and which is referred to as a time and rate fee.


36A.139 Liquidator’s call on contributories

Once the list of contributories is settled then the liquidator can write to the contributories and ask them formally for their proposal for payment.  If the contributories fail to respond or make no reasonable offer, the liquidator can then make an application to court for leave to make the calls.  The court order obtained establishes the liquidator’s ability to take enforcement action on the debt should it remain unpaid.


36A.140 Payment in to the ISA of unclaimed dividends (following dissolution)

Where there is a surplus arising in a liquidation following compulsory winding up proceedings and the liquidator has invited shareholders to make a claim, any surplus monies not claimed by contributories [note 7] still held by the liquidator upon the dissolution of the company, must be paid into the Insolvency Services Account (ISA). In cases administered by the official receiver the unclaimed surplus will already be held in the ISA [note 8].

It should be noted that where a dividend or other sum is paid to a person via a payment instrument such as a credit transfer or cheque,  6 months or more from the date of the payment instrument must have elapsed before any payment is made in to the ISA in respect of the unclaimed dividend or sum. In cases administered by the official receiver the monies are already held in the ISA [note 9].


36A.141 Preference shares

Preference shares are shares authorised by the memorandum or articles of association and are entitled to some priority over the other shares of the company. There may be several classes of preference shares ranking one after the other. Preference shares do not as a matter of course have a priority in the repayment of capital in a winding up. However, this right is usually given by the articles of association of a company. If so, the surplus is applied as follows after the payment of all the company’s debts and liabilities:

i) arrears of preference dividend;

ii) repayment of preference capital; then

iii) repayment of ordinary shareholders' capital.

Where there are surplus assets available after discharging all the company’s liabilities and repayment of the capital to shareholders, and there is no reference made in the articles giving preference shareholders further rights to capital in such a surplus, then the preference shareholders have no right to participate in such surplus assets Re Wilson and Clyde Coal Co Ltd v Scottish Insurance Corporation Ltd 1949 S.C. (H.L.) 90.  Where the articles do provide further rights for preference shareholders they are entitled to share in surplus assets after the repayment of capital. The articles of association should always be consulted in these circumstances.


36A.142 Surplus assets - power to make over assets to employees

Before the commencement of a winding up,  a company may have resolved under section 247 of the CA2006 [note 10] to provide for employees and former employees in the event of the cessation or transfer of the company’s business,  by making over assets to employees. Any such payment must be made out of profits of the company which are available for dividend. 

Once the winding up has commenced, the liquidator may still make over assets to the employees [note 11]. Any payment must be taken from the company's assets which are available to the members on the winding up i.e. the surplus held by the liquidator after all the costs of the winding up have been met and the company’s debts have been fully satisfied, including the payment of any interest.  The liquidator should also ensure that the company has made a resolution (by ordinary resolution of the shareholders unless a larger majority has been stipulated in the company memorandum and articles), sanctioning the exercising of its power to provide for employees[note 12]. In practice this is likely to be a rare occurrence. Also in compulsory liquidations, the actions of the liquidator’s power in this regard can be challenged by an application being made to the court by any creditor or contributory [note 13].  


Section 2 -  Return of surplus to bankrupt  

36A.143 Surplus in bankruptcy 

Where a surplus remains after payment of the expenses of the bankruptcy and payment in full and with interest of all the bankrupt’s creditors, the bankrupt is entitled to the surplus [note 14] (see also Part 4 of this chapter regarding accounting for future debts, interest and unproved creditors). Where the trustee has paid interest at the statutory rate to all the creditors, he/she may consider waiting 28 days to pay the surplus to the bankrupt, to allow for late notification from a creditor of contractual interest above the statutory interest rate which is applicable to the debt.


36A.144 Surplus in first estate where bankrupt subject to a subsequent bankruptcy order

Where an individual is the subject of more than one bankruptcy order, if there is a surplus arising in the first estate, following the payment in full of all expenses and creditors (including interest), that surplus becomes an asset in the subsequent bankruptcy and as a result should not be paid to the bankrupt. It should be paid in to the subsequent estate as a normal asset, and is subject to the same fees as other assets recovered in the subsequent estate [note 15].  Further information on the relationship between first and subsequent bankruptcies against the same individual can be found at Chapter 21.


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