Lots of companies will struggle to come out of the current lockdown crisis and the directors/shareholders may be thinking of putting that company into liquidation or administration and starting again debt free in a new company.
That may be a good option but it does come with risks for the directors and shareholders and may well create operational issues for the new company.
The risks for directors can include
- being pursued personally for any overdrawn directors loan account balance
- being pursued personally for any loan account from the directors to the company being repaid in the last 2 years
- any assets they transfer to themselves at below market value can be recovered
- if the company has been making losses and has continued to take new credit, the directors can be pursued for the loss created from when they knew the company was insolvent
- a report will be submitted on their conduct in managing the company that may result in them being disqualified from acting as a company director
- any creditor owed debt that is guaranteed by the director will pursue them for the balance. These will usually be banks, key suppliers and asset finance companies
Shareholders will be at risk if any dividends have been paid to them recently as dividends can only be paid from realised profits and losses less any unrealised but anticipated losses
Operational issues can include
- any assets transferred from the old company to the new company must be at market value and be paid for, otherwise they will be recovered by the liquidator or administrator of the old company
- If the business has been transferred to a new company, that may become liable for the rights and claims of former employees for redundancy, pay in lieu of notice and holiday pay and may be forced to adopt their contracts of employment
- Suppliers may not want to supply a new company that has left their old debt unpaid. Some suppliers may increase the price to the new company to try to recover the debt from the old company. Others may want personal guarantees from directors
- Any liquidator or administrator will investigate the transfer of business to the new company and will want paying for customer data, assets, websites, current orders etc
- The new company won’t be able to use a name similar to the old company due to the insolvency of that company.
With full professional advice any issues around closing one company down and starting another can be identified to allow the directors and shareholders to take an informed decision.
Some risks may be avoided or mitigated to an acceptable level.
It may be that the current company can be saved with its good reputation and trading record intact.
Harrisons Business Rescue can help directors and shareholders make the right choices based on facts with full disclosure of the potential risks to them