Guide for Directors Starting a New Company After Liquidation

Most companies face financial difficulties during their business life. However, for some, the very realistic threat of company liquidation rears its head. Company liquidation may seem bleak, but for some directors, the liquidation of a company offers new opportunities for business and the chance to start a new enterprise. This article will outline the process for starting a new company as a director, if your previous business went into liquidation.


Starting a new company post-liquidation

Generally, you can be the director of as many companies as you would like. However you must bare in mind that you owe duties as a director to every company you are appointed to, so should not stretch yourself too thin. Life after the liquidation of a company can continue, with some restrictions in place to avoid confusion for creditors and other stakeholders.

More often than not, it is a common occurrence for companies to close but for their trading, brand and assets to continue under a new legal entity. If eligible and the underlying business is viable, pre-pack asset sales may be the best option for your company – offering a new chance as a sustainable and profitable business. For more information on the company liquidation procedure and the process of closing a limited company – you can read our guide for directors.

 

New Company

Limited liability framework

The directors are protected from the personal liabilities for the company debts when a company faces insolvency. However, there are exceptions to this rule. For example, where a personal guarantee has been given or the directors have failed in their duties causing losses to the company.

There are many reasons as to why a company is facing liquidation. The limited liability framework protects directors who have not failed in their duties, and the external factors were out of their control. For example, several reasons as to why the liquidation process occurs are as follows:

  • There are genuine and measurable reasons for the company’s financial difficulties, such as your particular market has declined and is not as profitable as before.
  • Large customers that accounted for major parts of your revenue have gone elsewhere, or themselves entered liquidation.
  • An unexpected bill has affected your company cash flow.
  • Your debtors are not paying their bills, and you are unable to collect money from those who owe you.

 

The legislation recognises that, in some cases, it is beneficial for directors to start a new company with a similar name and trade. However, there are some restrictions on restarting the business and using the company name, which we will outline below.

Restrictions on re-starting business of a liquidated company

Insolvency legislation prohibits all directors acting in the period of 12 months prior to the company entering liquidation, from carrying out the below for five years:

  • Become director of a company trading under a similar name and style.
  • Get involved in the formation, promotion or management of a company under a registered or trading name.

 

Breaching the insolvency legislation is criminal offence and can lead those involved to a fine or even imprisonment.

Reuse of company name

There are several restrictions in place to the reuse of company name after liquidation. This is to ensure that directors are not running up debts, entering liquidation and starting a new company following the same circle. Insolvency legislation prevents the same name or similar name being used again, but there are exceptions to the rules:

  • Purchase of business. If a company purchases the whole, or a substantial amount, of the liquidated company – a similar name may be used providing all stakeholders are notified of the intention.
  • Court permission. An application to court can be made to reuse a similar registered or trading name for the new company.
  • Existing use. If your company have been trading and using what would be considered a ‘prohibited name’ during the 12 months prior to liquidation, this name can be used.

 

You can find out more on the reuse of a company name after liquidation here.

Transfer of assets

The transfer of assets from the insolvent company to that of the new, limited company should not occur without intention to pay. You will need an independent valuation to ensure that you are paying a fair price for the company assets, and funds must be paid for the benefit of all creditors, not just the people you want to work with in your new company. The liabilities will remain as a creditor of the company, when the existing business is liquidated, to the extent that they are not personally guaranteed.

Pre-pack administration

Pre-pack administration may be an option for a new route to your business, as long as criteria are met. This allows existing directors to purchase some or all company assets. As pre-pack administration has become more widely used, it has gained some negative publicity for lacking ‘transparency’, and leaving creditors out of decision making processes. However, it is still popular and remains effective.

Anyone can purchase the company assets with pre-pack administration. However, businesses are often considered more valuable to their previous management, which is why most pre-pack sales tend to go to a reformed entity of previous management.

In order to reassure creditors that pre-pack administration will deliver the best possible return to creditors, there are rules in place that must be adhered to as part of the Statement of Insolvency Practice 16. This requires the insolvency practitioner to state full disclosure as to how the option of pre-pack administration was the best outcome for creditors, over other insolvency procedures. Directors must also offer full disclosure for the purchase of company assets.

Advantages of pre-pack administration

Pre-pack administration is a, typically, fast process, which is one of the main advantages to the sale. There are many other advantages:

  • Company trading is relatively uninterrupted
  • The perception of the business is still undamaged
  • A pre-pack sale can help save the jobs of your company employees

 

However, before pre-pack administration can be considered, it’s important to note the possible consequences. Creditors may lose money with the sale, and certain suppliers may be unwilling to work with the ‘newco’ (new company). Likewise, you may be able to save jobs but not withstand the level of staff at the previous company.

If you are still unsure about the procedure of starting a new company from liquidation or administration, our business rescue experts will be able to take you through the process.

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