If a company is facing financial difficulty partly due to outstanding debts, the directors may decide the best action is to close the business. However there is nothing to stop a director starting up a new company and buying relevant assets from the liquidator to make it a going concern.
Where a company is struggling financially and unable to continue trading perhaps due to a downturn in business and the weight of its outstanding debts, the director or directors may decide the best course of action is to close the business. This process is known as a creditors voluntary liquidation. In essence, the company's creditors agree to liquidate the assets of the business and take a share of them to minimise their losses.
An Insolvency Practitioner will be appointed to liquidate the company. One of the liquidator's roles is to try and sell the assets of the company for the best price. Normally the liquidator will get a valuation and then offer the assets to the highest bidder. At this point, there is nothing to stop a director of the original business setting up a new company and making a bid for any or all of the assets which can then be used in the new enterprise. In this way a new company can be established by one or all of the original company directors and continue to trade without the burden of the old company's debt.
I have recently worked with a company director who carried out this process. The original business was purchased through a limited company about 18 months ago. The business had a historic debt of around GBP 150,000. Due to the economic downturn reducing business the repayments of GBP 5k a month were no longer sustainable. The company's director decided that the best course of action was to liquidate the business.
Once a liquidator was appointed, the director made an offer of circa GBP 10k for the stock held in the business. This offer was accepted by the liquidator and the stock was transferred to a new limited company which the director set up. This new business has started to trade successfully without the burden of the old company's debt.
This solution worked extremely well for the director highlighted above. However, before considering this option, company directors must ensure that they are not at risk of being accused of wrongful trading by the liquidator of the original business. One of the duties of a liquidator is to complete a review of all of the directors of a liquidated company to establish that they have not been guilty of wrongful trading or the theft of assets from the old business. If any wrong doing were established, the directors involved could be banned from acting as directors of any other current or future business. They may also be held personally liable for some of the old company's debts. As such, it would be prudent for any director intending to set up a new business and make a bid for the old company's assets to ensure first that they would not be so accused.
One of the risks of attempting to buy assets from a liquidated company is the possibility that the liquidator will sell the desired assets to an alternative bidder. One way to reduce this risk is to consider a pre pack liquidation process (more commonly known as business phoenixing). This is where a deal to purchase a failing company's assets is pre agreed with a liquidator before the business is actually put into liquidation. However, this process is generally only suitable for businesses with assets valued at more than GBP 15,000.
For a number of people, the process of liquidating one company and starting to trade through another seems simply to be a way to avoid paying the old company's debts thus leaving creditors high and dry. However, the process can only be undertaken where the original company is at risk of failure anyway and thus facing the prospect of closure. In these circumstances, the creditors will lose out anyway with the additional prospect of job losses and no further trade with the company's suppliers. This situation is not good for the economy. As such, I believe that where the fundamentals of a business are sound, it is important to consider the option of transferring assets to a new company therefore providing continuity of trade and the protection of jobs.
What happens to the directors if a company is wound up?
Once a company is being wound up a Liquidator will be appointed. The liquidator will undertake an investigation into the conduct of the directors to see whether they have knowingly allowed the business to trade while insolvent thus making the creditor's position worse. If this is the case, a director may face being disqualified and held personally liable for the company's debts. As a Director we look at the options you have.
What will having a County Court Judgement do to my company
If a county court judgement remains unpaid, this could lead to more serious action being taken against the business. We look at the impact and what you can do.
Company debt restructure to improve cash flow
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