Company Liquidation does not have to be the end of the road for businesses

COMPANY DEBT ANALYSER

Company Liquidation does not have to be the end of the road for businesses

If a company is struggling 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.

During a creditors voluntary liquidation, an insolvency practitioner is appointed as liquidator.

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. During this process, 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.

An example of this process.

The original business was purchased through a limited company approximately 18 months ago. The business’ legacy debt was c£150,000 which should have been repaid at the rate of £5k per month. Unfortunately due to the economic downturn, the turnover of the business dramatically reduced meaning that these payments were no longer viable. 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 c£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 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 £15,000.

To many, 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. Given this, 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.

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