It may seem counter intuitive, but one of the best ways to ensure recovery of a distressed business is to go through a quick liquidation process.
Whilst winding up a limited company means the end of the legal entity that is the company this is no reason to think that the actual business of the firm needs to stop. In fact it is a more common occurrence than people think for a business to close but for the trading style, brand and assets of the firm to continue.
If we imagine a very healthy company that has been saddled with historical debts but has a profitable trading business, it makes sense that the ‘good’ business is separated from the ‘bad’ allowing the new company to flourish and provide jobs in the future. Eliminating a firm simply due to some bad decisions that may have been taken years before or by people no longer with the firm seems irrational.
This makes sense when viewed from the point of view of the employees of course as they are able to continue in their jobs but with the knowledge that they have the security of a healthy and flourishing business behind them.
It is often the case that a business may be essentially profitable at an operational level but may be saddled with very high interest payments on legacy debt, may be tied in to a very large contract that has ceased to be profitable or to a lease on premises that are costly and no longer meet its needs. In these cases the day to day profitability will be eroded by the legacy issues and the firm may find itself facing Administration.
By taking quick action the directors could ensure that the legal entity that is the company is wound up in a structured and professional way by a licenced insolvency practitioner, and a new ‘phoenix’ company (newco) is formed which buys the assets and the good business from the old.
The old company retains those aspects of the bad business and is liquidated with any remaining cash and of course the proceeds of the sale to the ‘newco’. Using this structured and managed way to close a limited company ensures that maximum value is retained for the creditors.
Again it may seem that this presents a rather unattractive proposition for creditors however the alternative is even less palatable. Let’s imagine the same company carrying on as long as it can. Before long the interest or lease payments take their toll and the firms’ bills start to take longer and longer to pay. Eventually the directors lose the battle and the company is faced with insolvency but any reasonable chance of saving the trading company is lost along with any remaining value for the now larger list of creditors. The employees also suffer as the firm then closes down with loss of jobs as a result.
A managed liquidation of a company is also better for the directors. Opting for a quick liquidation is cheaper than waiting until it is forced upon them by bankruptcy. The chances of accusations of wrongful trading through insolvency are reduced and the directors can then be free to get on with managing the newco secure in the knowledge that they have done their legal duty .
Restructuring a limited company in this way ensures that the brand and trading styles of a business can be retained. It means that the firm is still able to serve its customers and given that it should now be a profitable and cash positive company may well mean that it is able to expand and grow. All of which means that a restructured firm that was to all intents and purposes failing now becomes a valuable asset to society providing jobs and of course taxation income for the economy.
Liquidation isn’t right for every company and there are other ways the firms can restructure. There are also clearly costs and legal implications so we’d always advocate that specialist advice is taken from a licenced Insolvency Practitioner before making any decisions. However liquidation in the right circumstances can prove to be good for the directors, employees, creditors and customers of an insolvent company.