Published: 2nd March 2020
If you own and run several companies which make up part of a group, there may come a time when you want to close one or more of these while continuing to trade with the others. There are a variety of reasons behind this but it is often the case of wanting to close down an unprofitable arm of the company.
This is best illustrated with an example:
Let’s say you run 3 restaurants, all operating under the same trading name. The three restaurants are registered as different limited companies, but all of them are 100% owned by a holding company.
While the brand as a whole is strong, one of the restaurants is not performing well and as a result is in debt. In order to get things back on track you want to close the one unprofitable restaurant while keeping the other two active.
The first question you may be asking is ‘is this even possible?’ Not only is it possible but in the majority of cases liquidating a loss making business makes a lot of sense. There is, however, much to consider before going down this route and it is vital that you enlist the help of a qualified insolvency practitioner before making any decisions. Here are the answers to a few key questions:
This all depends on how long have the other companies been trading. Section 216 of the Insolvency Act 1986 sets out certain restrictions placed on the directors of liquidated companies regarding reusing the same trading name for their future ventures. The rules mean that an individual cannot liquidate ‘Company xyz’, then immediately set up another company also called ‘Company xyz’ and resume trading. These restrictions are levied upon anyone who has acted as a director or shadow director of the liquidated company at any point in the 12 months prior to the liquidation. The restrictions remain in place for 5 years following the insolvent liquidation.
However, there are certain exceptions to this rule. In the case where you have a chain of companies all operating under the same name, you will be able to continue trading under this name providing the companies have been trading as such for a period in excess of 12 months (without being dormant at any point during this time). If this period is less than 12 months you will need to seek specialist advice on where you stand and whether you can legally continue to trade under this name. A licenced insolvency practitioner will be able to help you with this.
In the vast majority of cases the answer is yes. The only exception will be if you are disqualified as a director following an investigation into the liquidation. It is worth saying that this is highly unlikely and director disqualification is very rare. Companies fail all the time and you will not be punished for yours becoming insolvent. Providing the actions which lead to the company’s insolvency were not deliberate, you will be free to continue acting as a director for any companies you already have or indeed any you want to set up in the future.
The insolvent limited company is its own entity and remains separate from any other companies you also have directorship over. As a result creditors will not be able to take further action against you for debts owed by the liquidated company. However, you do need to ensure that no cross guarantees have been offered by either the holding company or the associated companies, or that you have not registered for group VAT. If you are in this position you should seek professional advice about the implications this may have following liquidation.
On the subject of creditors, think carefully about who you are leaving out of pocket. If any of your suppliers will be left as outstanding creditors following the liquidation then you will need to give careful consideration to the implications of this if you are keen for them to continue supplying your remaining stores. If they refuse to continue doing business with you following the liquidation, how will this affect your other businesses going forward?
Another thing to be aware of are the leases on any premises associated with the business which is being liquidated. Although company debts are written off as part of the liquidation process, leases often have personal guarantees (PGs) attached to them. While this will not affect your other companies or the holding group, you as an individual will be personally liable for the payments associated with the lease.
Begbies Traynor can help clarify your position and determine whether liquidating an underperforming part of your company is appropriate. Our team of licensed insolvency practitioners can guide you through the whole process and explain the variety of options open to you and your business. Arrange your free no-obligation consultation today.