News
David Griffiths, an Insolvency Practitioner from Leonard Curtis, looks at why SME owners should not be swayed by fancy avoidance offers - there is usually a catch
Around a year ago, an accountant I know asked me to speak to one of his clients regarding a situation which seemed too good to be true. The clientes company was insolvent, and facing a seemingly inevitable liquidation, yet someone was offering to buy his worthless shares in the company and take away all his troubles.
The client explained that he was a director of a company (letes call it Cash Is Limited or CIL) that was heavily insolvent, with little in the way of assets, yet had huge liabilities some of which he had personally guaranteed. The company had ceased trading and there was no prospect of turning things around.
Despite all this, an unconnected company letes call it oo Good To Be True Limited, or GTBT for short - was selflessly willing to buy his shares for £1, have him resign as a director, and appoint a new director to deal with all those annoying liquidation formalities. Whates not to like?
Well, it turns out that there is quite a lot.
The newco wanted a fee upfront to buy the shares
In order for TGTBT to acquire his shares for £1, they wanted a fee which in this case was £10,000. So, they wanted to buy his shares for £1, but only after being given £10,000 first.
Liquidator can investigate conduct of all previous directors
Whilst the director of CIL thought that he could skip merrily into the sunset with all that nasty business behind him, the truth would be quite different. A liquidator, once appointed, will investigate the conduct of all directors of the liquidated company in the three years prior to insolvency. The consequences for a former director of CIL would be largely the same as they would have been had he not resigned. While in most cases, directors of insolvent companies have nothing to fear from these investigations, in some cases they do which can include personal liability or criminal sanction - and that will not change by them simply resigning before the event.
Obligations still in place to stakeholders
The director of CIL would still have obligations under the personal guarantees he has given to various lenders and suppliers. These will not disappear, and cannot be assigned to TGTBT or anyone else without the agreement of the lender or supplier, which it is fair to assume would not be acceptable to those parties, or to TGTBT.
So all in all, not quite the outcome the director of CIL was expecting. Fortunately, in this case the director followed my advice and kept hold of his £10,000.
Government advice to directors
The government has recently responded to calls from the insolvency profession to provide greater guidance to directors on what steps to take if they are concerned their business may be facing insolvency.
The Insolvency Service has issued this useful guide, entitled Company health check: keeping your business on track, to help directors make sure they are acting in the best interests of their business and its stakeholders should their company face insolvency. It provides some really useful guidance at a time when we know business owners are still weathering difficult storms.
So dont be caught out. Take advice early and maximise the options available. Moral of the story? Too good to be true insolvency avoidance schemes are most likely exactly that.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Donec ultricies consequat.