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