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Should I just start again?

23 March 2020

COVID-19

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I have been asked the question by the directors of a company in light of the economic impact of Covid-19 should I just ‘throw the towel in’ and start again. This is an interesting question and will very much depend on the individual circumstances of the entity.

To enter into an insolvency procedure such as an insolvent liquidation or administration then the company needs to be insolvent which means that it either cannot pay its bills as they fall due or that the value of its assets is less than the level of its liabilities.

Pros to throwing the towel in

  • Removes the stress of managing creditors / cash flow
  • Deals with the entity’s creditors
  • Gives a fresh start

Cons of throwing the towel in

  • Reputational damage
  • TUPE is likely to apply so restarting will not deal with over staffing
  • The shareholders may not be able acquire the business and assets back as they could be in a competitive bidding position
  • Property leases are likely to be determined and therefore if premises are to be retained new negotiations with the landlord will be necessary
  • HMRC may require a bond equivalent to 6 month’s VAT to enable the new company to register
  • Monopoly suppliers may require debts of the previous company to be paid before supplying to the new business
  • Many suppliers may require cash on delivery
  • The new business will require funding
  • Lease contracts such as mobile phones will require transferring to the new company
  • There will be an investigation into the directors’ conduct and this could in rare circumstances result in disqualification or action against directors to recover monies on behalf the creditors

It will be a very hard decision for directors to go into liquidation / administration and is certainly not a decision to be taken lightly – sometimes the extent of the creditors and poor prospects for the future may mean that this however is the only viable option.

If you want to talk about the options for your business including turnaround, company voluntary arrangement, liquidation or administration please contact Sandra Mundy for a free of charge initial consultation.