Owner Benefits

Owner Benefits

At first sight it may seem that there can be no possible upside for the owners to a company going into liquidation however a properly managed insolvency process can have its positive aspects.

Traditionally, liquidation is seen as a result of failure of management or trading but it is true to say that in a group some businesses may just have run their course. Consider a business that used to manufacture 35mm film for cameras. Whilst there are still some enthusiasts it is fair to say that this is a market that has simply died. A business that has seen one of its subsidiaries may choose to liquidate the firm rather than continue swimming against the tide.

Carrying on the business of the company when there is no reasonable prospect of the creditors of the firm being paid is called wrongful trading and a director (or a shadow director) can be held to be personally liable for any debts incurred. It’s important to note that this isn’t insolvent trading. The distinction between the two is that an insolvent company may have a realistic prospect of trading out of their temporary difficulties whereas a company trading wrongfully has no prospect of ever being paying back their creditors. Swift action to place the business in the hands of the liquidator will help to fend off any action in this regard.

By putting the company into Voluntary Liquidation quickly the directors can ensure that wrongful trading won’t happen and they can show they have acted in the best interest of any creditors. This means that they shouldn’t be held liable by the liquidator or the courts. Once business enters the insolvency process debt collection action ceases. If nothing else the reduction in stress for the owners is a considerable benefit. Once an insolvency practitioner is appointed the executives that have been dealing on a day to day (or even hour to hour) basis with creditors will have that particular burden eased.

The insolvency and liquidation process is a way of re-evaluating the methods and business model of the firm. Whilst it may seem a drastic way of changing mind-set it is true that company directors often value the opportunity to stop and take stock of the situation. A business under stress will exhibit short-termism in decision making and executives will often find themselves dealing with immediate issues rather than planning for the longer term. Liquidating a bad business and starting afresh allows owners to take a more pragmatic and strategic view rather than trying to make the best of a bad lot.

A business that has significant structural issues such as legacy debt or contingent liabilities can be placed into liquidation in a pre-pack administration. This means that the business as such ceases to trade and its assets are bought by a new company or ‘Newco’. By conducting this form of ‘phoenix’ arrangement the good parts of the business and the jobs of the employees can be protected whilst the debts that stopped it from making progress can be shed. In this instance any useful parts of the business that has value will be rescued. This can include the plant and machinery, stock and any intangible assets that the business has built up such as Intellectual Property or brands.

Business owners may be well to consider a voluntary liquidation because this means that the directors can ensure that the costs and stress of a creditors compulsory winding up is avoided leaving them clear to move on quickly to new opportunities.

Taking professional and qualified advice is vital through the insolvency process and it is important to make the call early on to ensure that you have the right advice at the right time. Getting good advice quickly will give directors more options for the future and protect them from problems in the past. Liquidation can have significant upsides for the owners of businesses in distress and getting accurate and timely information can be both effective and reassuring

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