What can you do and what should you avoid?
Profit warnings from UK-listed companies reached a two-year high between July and September, analysis by EY-Parthenon shows.
But the possibility of selling your business to avoid liquidation has come under the spotlight thanks to the activities of a group called Atherton, which encouraged directors battling with company debts to “sell their businesses and avoid liquidation” via a scheme that enables people running struggling companies to distance themselves from a failure.
This action may be a breach of s238 of the Insolvency Act 1986 – Transactions at Undervalue.
The Insolvency Service has closed seven companies “that were part of a group that allegedly deliberately undermined the insolvency regime.”
Atherton Corporate and associated companies traded as National Company Rescue and were closed down late July 2024.
Strictly speaking a business owner should not sell an insolvent business. The starting point is that company directors of an insolvent business should cease trading immediately and appoint liquidators, who then step into the role of the directors and may decide to sell some of the business assets.
In order to avoid a claim that you have transferred the assets at an undervalue then you need to get them valued professionally.
Being insolvent means you can no longer pay your debts as they fall due.
There are two main kinds:
The first kind is cash-flow insolvency, where the business doesn’t have enough accessible cash to pay its debts, but does have illiquid assets.
The second and more serious kind of insolvency is balance-sheet insolvency.
This is where your company’s total debts are greater than its total assets (liquid or otherwise).
If you fear your business may be heading for insolvency you can take some steps to avoid this:
- Work out your business finances: make a list of what assets you own and the liabilities you have, and get a proper idea of where you are financially. This is really a balance sheet in accountant’s terms.
- Make a realistic cash flow projection for the next few months and see where the pressure points are. For example, can VAT and PAYE be paid on time? If you’re a seasonal business, can you survive the quiet part of the year? Once complete, you can assess whether you can carry on trading or not.
- If manageable, talk to suppliers to whom you owe money and ask for instalment options. Talk to HM Revenue and Customs and ask for Time To Pay (TTP), and justify why you need the time.
- If you can’t manage the situation yourself, take professional advice from an accountant or a licensed insolvency practitioner.
Ideally, we would advise that you accept that you can’t deal with this alone and you should talk to a restructuring or insolvency advisor.