Key Risks For A Director Selling An Insolvent Company

One of the key risks for a director selling an insolvent company will be that a sale of their shareholding will not dispose of their misconduct and wrongdoings. It can illuminate rather than eradicate the prospect of a director’s actions being the focus of an investigation.

This article explains why the opposite impact is potentially a lurking danger if an owner managed director sells their shares in an insolvent company that no longer trades when instead they need to liquidate a company.

Too Good To Be True – A Red Flag

 You can sell an insolvent company but why would someone buy it? An obvious question that needs an obvious answer to overcome the perhaps inevitable suspicion that it all may seem too good to be true.

Companies that often offer to buy insolvent companies may be unregulated and can suggest that it is a viable alternative to liquidation and avoid the need for an Insolvency Practitioner.

However, unless there is a core trading business or a brand with intellectual property that justifies continuity, a business that is losing money or ceased trading, insolvent and destined for liquidation, will typically be worthless.

If it seems too good to be true it usually is.

What Is Sold When Selling An Insolvent Company?

It is usually the shares in the insolvent company that are sold when a director sells the company. 

That means the current director can then be replaced by a new director at the instruction of the new shareholder(s). 

At the same time upon the current director(s) resigning and being replaced, they will need to hand over to the new director(s) all of the books and records of the company. 

Why Is It Potentially Risky?

It is potentially a risky thing to do because once the company shares are sold the director who was running the company will then lose complete control of the company. That is not the same as washing their hands of the problem; it is simply trying to walk away from it.

Upon resigning as a director they will lose control of the company’s records, the appointment of the new directors and the narrative of the reasons for the company’s failure if it were to go into liquidation, as that would be a role handed over to the new directors. 

If the company has ceased trading already or done so as a result of the sale then investigation of any misconduct will largely relate to the period of trading not only the period during which the last director was in control.

Directors who breach their director duties typically do so when trading because that is usually how loss is caused to creditors that trigger insolvencies. If the new director(s) were to continue trading the insolvent company they could be found guilty of wrongful trading and have a personal risk for new debts run up, so they will usually not embark upon any further trading activities.

It Does Not Stop Or Avoid Liquidation

The sale of an insolvent company is often perceived as an alternative to going into liquidation. However, this perception is often wrong.

In many instances such insolvent companies will still go into liquidation but simply at a later date. A creditor might wind up the company through the compulsory liquidation procedure or the new owner may suffer an objection to striking off the company if they have attempted to dissolve it by using the DS01 form to strike off a company for it still to go into liquidation.

Reporting On Directors For The Last 3 Years

Director conduct reporting in a liquidation means any voluntary liquidator (such as one appointed following a creditors voluntary liquidation) has a duty to report to the Insolvency Service on the conduct of anyone who has been a director of the company in the last 3 years.

As a result, simply selling the shares means that in the event of liquidation, a director’s conduct may still be subject to reporting to the Insolvency Service.

Potentially Highlights A Need For Investigation

As a result, selling an insolvent company that has ceased trading will often not look good. 

This can potentially highlight a need for more detailed investigations to unearth what might have gone on and as a result, can conceivably put the spotlight on the director(s) all the more.

This is notably the case given some organisations involved in the purchase of insolvent companies have been wound up by the Insolvency Service as highlighted by its article: Companies promoting ‘corporate rescue’ scheme shut down after undermining insolvency regime.

Take Advice

Our CEO, Elliot Green, has almost 25 years of experience, dealing with hundreds of solvent and insolvent businesses. We are members of the Association of Business Recovery Professionals (R3) and are regulated by the ICAEW.

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