David Griffiths, an insolvency practitioner at Leonard Curtis in Wolverhampton, examines why SME owners shouldn’t be swayed by fancy avoidance offers – there’s usually a catch.
About a year ago, an accountant I know asked me to speak to one of his clients about a situation that sounded too good to be true. The client’s business was insolvent and facing a seemingly inevitable liquidation, but someone was offering to buy his worthless shares in the company and get him out of all his trouble.
The client explained that he was a director of a company (let’s call it “Cash Is Limited” or “CIL”) that was highly insolvent, with few assets, but had huge liabilities – some of which he had personally guaranteed. The company had gone out of business and there was no prospect of turning things around.
Despite all this, an unconnected company – let’s call it ‘Too Good To Be True Limited’, or ‘TGBTT’ for short – was selflessly willing to buy his shares for £1, have him resign as administrator and to appoint a new director. to take care of all those tedious liquidation formalities. What’s not to like?
Well, it turns out there are a lot.
The newco wanted an upfront fee to buy the shares.
In order for TGTBT to acquire its shares for £1, they wanted a commission – which in this case was £10,000. Thus, they wanted to ‘buy’ his shares for £1, but only after first receiving £10,000.
The liquidator can investigate the conduct of all previous administrators
While the director of CIL thought he could jump happily into the sunset with all his nasty business behind him, the truth would be quite different. A liquidator, once appointed, will investigate the conduct of all directors of the liquidated company during the three years preceding insolvency. The consequences for a former administrator of the CIL would be substantially the same as they would have been if he had not resigned. While in most cases directors of insolvent companies have nothing to fear from these investigations, in some cases they do – which may include personal liability or criminal sanction – and that will not change if they simply resign before the event.
Obligations still in place towards stakeholders
The director of CIL would still have obligations under the personal guarantees he gave to various lenders and suppliers. These will not disappear and may not be assigned to TGTBT or anyone else without the agreement of the lender or supplier, which it is fair to assume would not be acceptable to these parties or to TGTBT.
In short, not quite the result expected by the director of the CIL. Luckily in this case the manager took my advice and kept his £10,000.
Government advice to directors
The government has recently responded to calls from the insolvency profession to better guide administrators on what to do if they fear their business may face insolvency.
The Insolvency Service has published this helpful guide, titled Business Health Check: Keeping Your Business on Track, to help directors ensure they are acting in the best interests of their business and its stakeholders in the event of their business’ insolvency. It provides some very helpful advice at a time when we know business owners are still going through tough storms.
So don’t be caught off guard. Take advice early and maximize the options available. Moral of the story? Too good to be true, insolvency avoidance schemes are most likely exactly that.