Derek Cooper

Why you should Wind Up the old company before starting a new one

Why you should Wind Up the old company before starting a new one

When a company finds itself in a position where it just cannot afford to it pay its outstanding debt, I have had a number of directors ask me whether they can just shut up shop and wait for HMRC to issue a winding up order. In the mean time, the directors plan is to start a new business and carry on trading. Why is this not the best option?

More and more often a company's creditors take action against it for unpaid debts in the form of a Winding Up Petition. If the debt remains unpaid and a winding up order is granted, the court will appoint a liquidator and the company will be closed.

Frequently the main creditor associated with a struggling company will be the Inland Revenue (now known as HMRC) with the business owing employees income tax (PAYE), National Insurance contributions and VAT. In my experience, HMRC debts tend to be left unpaid in a struggling business as they do not pose an immediate threat. What I mean by this is that if a commercial supplier to the business is not paid, they will normally withhold future supply which will strangle the business. If the business is to continue to function, such outstanding invoices have to be paid. This is not the same with HMRC debt which may be left unpaid with seemingly no ill effect for the company. However, HMRC will of course catch up with the debt eventually.

When a company finds itself in a position where it just cannot afford to it pay its outstanding debt, the directors often ask me whether they can just shut up shop and wait for HMRC to follow through a Winding Up Petition. In the mean time, the directors plan is to start a new business and carry on trading. There are two important factors to consider in this scenario.

1. If in order to start trading, the new business needs equipment and other assets from the old, these cannot just be removed from the old company. This would in effect be an act of theft and would leave the old business with even less ability to settle its debts with creditors upon its liquidation. A liquidator of the old business can force assets to be returned if they find they have been taken without appropriate payment.
   
   
2. Once a winding up petition is eventually issued against the old company, the court will appoint a liquidator to close the business. One of the duties of the liquidator will be to investigate the old directors of the company to see if they have acted properly. If the directors have simply left the business and its creditors making no attempt to manage the company's closure properly, the liquidator may start to look for reasons why the directors should be accused of wrongful trading and potentially be banned from the directorships of other businesses. Certainly, if directors have taken business assets which have not been properly paid for to aid in the start up of a new company, the liquidator is likely to take a very dim view of this.

My advice to directors is avoid these problems by dealing with the winding up of the failing business properly. There are two ways to do this.

Firstly if the directors or other investors simply want to liquidate the business, they should appoint an insolvency practitioner and start a Creditors Voluntary Liquidation (CVL). This process has an associated cost of normally GBP 4000-GBP 7000 which would have to be paid out of business assets or if there are non available, by the directors / shareholders themselves. Appointing an Insolvency Practitioner to deal properly with the closure helps with delivering the report on the directors.

Alternatively if the directors want to try and salvage some of the business and start trading under a different name, it would be sensible to consider a Pre-Pack Liquidation (commonly known as Phoenixing). This process would allow for the formation of a new company and the valuation and purchase of the old company's assets by the new business. This would be done within a proper legal framework which could not then be contested by creditors or a liquidator at a later date.

Where a company is failing, it is best to be in control of the closure - it is never a good idea to close the doors and walk away. If directors do not do this, the business' creditors (especially the Inland Revenue) will eventually petition for the company to be wound up. If the directors are not involved and in control of this process, at best, they may find that they are jeopardising their ability to continue acting as directors for other organisations. At worst, any new business they have set up may have to be closed as assets are returned to the liquidator of the old company.

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