When facing the distressing reality of an insolvent company, directors often look for quick fixes. One option might be to sell the company through firms which advertise themself as an alternative solution to formal insolvency proceedings, providing a brokerage service for directors to sell their interest in companies and supposedly leave their debts behind.
However, this route can lead to significant repercussions. Engaging with a Licensed Insolvency Practitioner (IP) is a safer, more effective approach. In this article, we’ll explore why working with an IP is crucial and outline the risks associated with selling an insolvent company without professional guidance.
Understanding the Role of an Insolvency Practitioner
Insolvency practitioners are professionals who specialise in handling insolvent companies. They are regulated by external professional bodies, ensuring they adhere to strict ethical and procedural standards. When a company becomes insolvent, an IP helps manage the liquidation or restructuring process, ensuring that the interests of creditors, employees, and other stakeholders are protected.
Key Risks of Selling an Insolvent Company
Inevitability of Liquidation
Selling an insolvent company might delay the inevitable, but it rarely solves the underlying problems. Eventually, the company is likely to face liquidation, at which point the former director will still be involved. As a former director, you could be subject to investigation regarding the company’s previous financial transactions. This scrutiny could reveal director misconduct, leading to potential legal consequences.
Legal and Financial Vulnerabilities
When selling an insolvent company, you expose yourself to several legal and financial risks. These include:
Wrongful Trading: Continuing to trade while knowing the company is insolvent can lead to personal liability for company debts.
Transactions at Undervalue: Selling company assets at less than their market value could be reversed by a liquidator, increasing your financial liabilities.
Preference: Favouring certain creditors over others before selling the company can result in legal repercussions, requiring repayment of favoured creditors.
Lack of Consumer Rights and Regulatory Oversight
When selling an insolvent company through an unregulated firm, you forfeit essential consumer protections. These firms are not subject to the same rigorous audits and standards as insolvency practitioners.
If you feel your money has been unfairly taken, you won’t have access to ombudsmen, cooling-off periods, or other consumer rights. They are often investigated by The Insolvency Service, and consequently shut down. This can leave you vulnerable to hidden legal fees and potential fraud investigations.
Consequences of Misconduct and Liability
Ongoing Responsibility and Investigation
Even after selling the company, you remain responsible for your actions as a former director. Under Section 236(3) of the Insolvency Act 1986, a liquidator can obtain any documents within your possession or control.
If you’ve surrendered books and records to the new owners, you may struggle to provide necessary evidence during an investigation.
Hidden Legal Fees and Fraud Risks
Selling an insolvent company often involves legal fees that can surpass any financial gains. Moreover, old companies with losses can attract individuals seeking tax evasion opportunities, potentially implicating you in future fraud investigations. Engaging with an IP mitigates these risks, as they operate within a regulated framework designed to protect all parties involved.
The Fallacy of Debt Alleviation
While selling the company might seem to relieve you of administrative burdens, the company’s debts remain. These debts are not transferred to the new director but stay with the company. If you’ve provided personal guarantees, selling the company does not absolve you of these obligations. The illusion of debt alleviation can lead to further financial complications down the line.
Advantages of Using an Insolvency Practitioner
Expert Guidance and Support
Insolvency practitioners have years of expertise and professional training. They provide comprehensive guidance through the liquidation or restructuring process, ensuring compliance with all legal requirements. This support reduces stress and helps directors navigate the complexities of insolvency.
Protection Against Legal Repercussions
An IP ensures that all transactions and decisions are made in accordance with the law, protecting you from accusations of wrongful trading, transactions at undervalue, and preference. By following a structured, regulated process, you minimise the risk of personal liability and financial penalties.
Transparency and Accountability
Working with an IP guarantees a transparent process, providing clarity to creditors and other stakeholders. This transparency fosters trust and facilitates smoother negotiations, potentially leading to more favourable outcomes for all parties involved.
Regulatory Oversight and Consumer Protection
Insolvency practitioners are regulated by professional bodies, ensuring they adhere to high standards of practice. This regulation includes regular audits and oversight, providing an additional layer of protection for directors and creditors alike. By choosing an IP, you benefit from these protections and avoid the pitfalls of dealing with unregulated firms.
At Leading, our insolvency practitioners have over 30 years of experience, dealing with hundreds of solvent and insolvent businesses. We are proud members of the Association of Business Recovery Professionals (R3) and the Insolvency Practitioners Association. We are also regulated by the ICAEW.
Conclusion
Selling an insolvent company through may seem like a quick fix, but it exposes you to significant risks and long-term repercussions. Engaging with a licensed insolvency practitioner offers a safer, more effective solution. Insolvency practitioners provide expert guidance, protect you from legal vulnerabilities, ensure transparency, and operate within a regulated framework designed to safeguard all stakeholders.
At Leading Business Services, our experienced team of insolvency practitioners is dedicated to helping you navigate the challenges of insolvency. Contact us today to learn more about how we can support you through this difficult time, ensuring compliance and reducing stress every step of the way. Call us on 01603 552028 or email us at mail@leading.uk.com.
