Can you sell an insolvent company? You can sell an insolvent company but it might not resolve the issues that led to the Director or Shareholder selling it in the first place. Whilst a Director can dispose of the shares in an insolvent company, they cannot remove themselves from any misconduct which led to the insolvency arising in the first place. Attempting to avoid a proper insolvency process through a share sale, using an insolvency avoidance scheme, is usually hopeless.
The recognised credible options, such as Creditors Voluntary Liquidation or Compulsory Liquidation, are formal legal procedures to deal with insolvent companies. In either case, a Liquidator would be appointed and attempt an orderly winding up of the company following the statutory framework known as the Insolvency Act 1986. Both the assets and the company would be dealt with.
Why Sell Your Insolvent Company?
A key reason some Directors might be attracted to the opportunity to sell their company is perhaps because of perceived issues associated with insolvent Liquidation. They may be concerned about having to meet and greet an Insolvency Practitioner associated with such a process. There might be the belief that selling the company could eliminate this.
It is unlikely that selling the company will address the risk a Director faces, which results from their own misconduct. That is why selling an insolvent company through the use of a liquidation evasion scheme is usually hopeless.
Once a Director trading an insolvent company enters into transactions or engages in some conduct that amounts to a breach of their Director duties, then what is done typically cannot be undone per se. Furthermore, attempting to avoid the obligations flowing from misfeasance or breach of duty could make the position worse.
Perceived Risk Of Liquidation
All insolvent Liquidations will involve the Liquidator undertaking investigations into the conduct of the Director(s). That is a core Liquidator duty under for example Statement of Insolvency Practice Number 2, so that creditors can understand the circumstances of the company’s demise and have confidence they have transparency over what has happened.
If a Director continues to trade a company that he or she knows will not really have the prospect of avoiding insolvent Liquidation and it makes further losses, this could amount to what is called Wrongful Trading. In a case of Wrongful Trading, a Director can be liable to contribute to the company by way of compensation for the additional losses caused.
Selling An Insolvent Company
The starting point is the position that you CAN sell an insolvent company.
There is no barrier to this but you might need to consider:
- What it is that is being sold.
- What the consequences are of the sale.
What Is Being Sold?
What is being sold when you sell your company is usually its SHARES, not its assets. Yet it is the assets and perhaps the name where any VALUE might be.
Why would someone purchase the shares of an insolvent company which had no viable future with just a lot of debt? If the name is not worth a great deal (as is usually the case) then why would someone offer something for the shares?
It is possible that somebody might be able to make some use of tax losses but that is unlikely to be a common event.
The other point to conceivably consider is how much someone is prepared to offer for the shares. If for example someone is prepared to purchase the shares for a low sum like say £1, then the question might be what is in it for them if they are then going to take responsibility for the company. When you take on a company ordinarily it has to file Accounts, Confirmation Statements and Tax Returns. Usually that costs money in employing accountants. If nothing else it will take up a good deal of someone’s time.
When a company is being sold the sale process may involve legal fees that could potentially dwarf any monies received for the shareholding. This is something to perhaps bear in mind.
Consequences Of Selling The Company
If a company is sold, then provided the Director who has sold it is able to resign (as a Director), it will be possible to hand the company over to the new owner.
If the new owner appoints a Director, then they will be responsible going forwards for the company. However, the new Director will not be responsible for what happened before they were appointed as Director. That will remain with the Director who has sold the company.
The notion that the sale of the company (ie. its shares) will alleviate the debt for the former Director is correct but only because they will not be handling the administration of the company going forwards. A Limited liability company’s debts are not the debts of the former Director (except if personal guarantees have been provided); they would always be the debts of the COMPANY and they would remain the debts of the COMPANY.
Nothing, therefore, appears to have changed. All that appears to have changed is who is dealing with the company.
The same position applies to the assets of the company. They remain with the company.
Is Director Misconduct Addressed By The Sale Of An Insolvent Company?
Director misconduct is NOT addressed by the sale of the insolvency company through its shares being sold. This is one of the key risks for a director selling an insolvent company.
It cannot realistically address the same without the provision of a full indemnity (perhaps) from the purchaser. This would be a likely rare prospect. However, even so, certain misconduct (eg. criminal conduct) would not be alleviated even via the provision of a full indemnity.
The reason any Director’s breach of duty cannot be addressed as a result of the sale of the shares is because the company is insolvent. When a company is insolvent, there is a duty that a Director has, which is known as the Creditor Duty. This is the duty to act in the interest of the creditors (not the shareholders) when a company is of doubtful solvency.
When a company is solvent, the Shareholders can relieve a Director who is guilty of misfeasance and ratify (forgive) the breach in accordance with Section 239 of the Companies Act 2006. However, when a company is insolvent it is usually not possible for the shareholders to do so (see Goldtrail Travel Ltd v Aydin & Ors [2014] EWHC 1587 (Ch) at [114] and [115]) because of the Creditor Duty.
Winding Up Petition Following Strike Off Objection
Furthermore, once the company has been sold, it is not unheard of for it then to be dissolved when there is for example only a failure to file Accounts or a Confirmation Statement.
At that point, Companies House will lodge a notice of the intended dissolution in the London Gazette which will often prompt a creditor to lodge an objection to striking off the company. They will then be able to issue a Winding Up Petition to put it into Compulsory Liquidation.
Even if the company is struck off it can still be restored to Companies House by a creditor and placed into Liquidation.
In other words, the actions to sell the company to avoid Liquidation may come to nothing.
Liquidation is a recognised legal procedure provided for in legislation so that Directors can seek to wind up insolvent companies.
What Happens To An Overdrawn Director’s Loan Account?
An Overdawn Director’s Loan Account (“ODLA”) is an asset of a company. When the shares are sold it remains a sum of money owed by the former Director to the company. The sale of the shares by the former Director has no bearing on the matter and at anytime the new Director can call in the ODLA.
If as part of the share sale, a deal is struck to materially reduce the ODLA by having the former Director for example repay only a small proportion of it back to the company then it is conceivable this could amount to a Transaction at an Undervalue which could be set aside at a later date by a Liquidator. The original Director could be called upon to repay the full amount notwithstanding the share sale agreement.
The same position could apply to other transactions that are referred to as antecedent transactions such as a Preference.
Books And Records
Consideration might be merited if a company owner sells the shares and the company still goes into Liquidation.
If you have resigned as Director and surrendered the books and records to the new owner who does not trade but attempts to strike off the company, then if a Liquidator comes along and asks the former Director (responsible for the trading activities) about certain transactions, they might struggle to provide evidence to justify them.
The answer to the question Can You Sell An Insolvent Company? is yes.
However, the effect of it does not remove the debts from the company and it may not do much to address a Director’s former misconduct. Their liabilities are unlikely to be affected.
Each case can be different and their facts need to be considered individually.
BUT there are instances in which it appears a Director may have thought the sale of the company was to be a panacea. They may have envisaged it could eliminate debts and potential misconduct. Such propositions may well not necessarily be so.
Therefore always consider taking independent professional advice on such matters and remember that if it seems too good to be true, it often is.
