May we live in interesting times?

Reading the written press can lead to a very negative view of Directors of Limited companies which are forced to seek the protection that the various Insolvency procedures afford.

Let us be clear: The whole point of limited liability is that, if the profit generating Company fails then the investors liability is limited to the value of the original investment (i.e., its share capital).

This position is justifiably complicated with the advent Director personal guarantees and bank security, but the starting point does not change.  Liability of a shareholder is limited, even if the Shareholder is a Director.  Directors are expected to make decisions on that basis.

So, what does this mean in practice for the Directors of a Company which has a failing business?  

If they receive an offer to buy key elements of the assets and business of the failing company for an amount more than anyone else would pay, then to comply with their statutory obligations they should have a very good reason not to accept it.  If they are the originator of that offer then there are a few further hurdles to cross but these are not, by any means, insurmountable.  

Where the problem starts is a Director seeking to get the maximum personal benefit from the purchase.  Again, there is nothing wrong with this in law but, if, as a Director, you are the beneficiary of such a transaction you need to accept a dose of realism.  You are clearly the one who knows where the bodies are buried and hence, whereas you are entitled to discount your offer to take account of what the problems are, you should not seek to attribute further discounts to take account of all the problems there might be!    

You may not like the advice that your chosen Insolvency Practitioner tells you in this regard and most people can come up with a few hurdles that they think are not relevant as well as a few problems that others might think exist but do not.    However, please be assured that the cost reductions that you might think you can achieve can be the most expensive of cost reductions in the fullness of time.  Trying to establish the point where the Insolvency Practitioner is happy, A crawling over the line approach and thereby limiting your short-term outgoings can end up being a very false economy.  A Director pitching his knowledge against boys and girls with many years’ experience of this sector (the Insolvency Practitioner community) is unlikely to end well.  

Covid-19 and its associated problems present their own issues and now is the time to make decisions.  For some businesses the government support will be enough to allow them to survive.  For others, it will not, and for some, my business included, you did not receive any support in any event.

But, for the first time in the life of your business has space.  HMRC will not be petitioning for a good while yet and, in most cases, it is unlikely that anyone else will execute the nuclear option.  This does not mean that you should be doing nothing now!!

So what should you do?

Plan, re plan and then plan again.  Think about the options and time at which they might be actioned.  And yes, do think about the costs and benefits of all the potential options you have, and you are clearly at liberty to consider what a fresh start would look like.  

You should consider whether your Company is sustainable now, sustainable in due course or over and, if the Company cannot survive, what you will do next?   If the answer involves doing almost exactly what you have done in the past in the future, but only after a delay whilst the world reopens then there will be several ways of achieving it.  The devil is however in the detail and will depend on the individual.  

Please do call us or email us at enquires@frostgroup.co.uk, if you wish to discuss your circumstances.

 

Article Written By: Jeremy Frost, Director
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