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Company liquidation
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Company liquidation
A close friend of mine has a recently-started business (a few months old) that, after a few months of trading, doesn't look as if it's viable. Cashflow OK for the moment, but there's a quarterly rent payment coming in a couple of months time that is in danger of taking his bank balance into the red. While he can probably find the cash from somewhere in the short term, business is significantly below expectations and it's probably not going to work much longer.
Prudently, the business was started as a limited company. His only major outgoings are the rent and the business rates. He's signed a 5-year lease with a 3-year break on his premises, and has spent about £10K improving those premises.
Needless to say though, he's a bit beside himself with worry. What should he be doing now - in terms of preparing for the likely failure? What should he be saying to his landlord, and what happens about the business rates? What will his exposure be personally, even though it's a limited company?
Prudently, the business was started as a limited company. His only major outgoings are the rent and the business rates. He's signed a 5-year lease with a 3-year break on his premises, and has spent about £10K improving those premises.
Needless to say though, he's a bit beside himself with worry. What should he be doing now - in terms of preparing for the likely failure? What should he be saying to his landlord, and what happens about the business rates? What will his exposure be personally, even though it's a limited company?
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- Lemon Half
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Re: Company liquidation
adriangs wrote:A close friend of mine has a recently-started business (a few months old) that, after a few months of trading, doesn't look as if it's viable. Cashflow OK for the moment, but there's a quarterly rent payment coming in a couple of months time that is in danger of taking his bank balance into the red. While he can probably find the cash from somewhere in the short term, business is significantly below expectations and it's probably not going to work much longer.
Prudently, the business was started as a limited company. His only major outgoings are the rent and the business rates. He's signed a 5-year lease with a 3-year break on his premises, and has spent about £10K improving those premises.
Needless to say though, he's a bit beside himself with worry. What should he be doing now - in terms of preparing for the likely failure? What should he be saying to his landlord, and what happens about the business rates? What will his exposure be personally, even though it's a limited company?
Given what you have said he would be wisest to fold immediately, perhaps whilst the ltd co is still solvent. The only reason to not do so if he thinks there is a significant cash influx that might prevent a bad situation getting worse. Even if he thinks that might happen temporarily then one should be very wary about how one times things, as being too canny can expose a director to risk.
It takes courage not to keep on digging a bigger hole. The easy thing is to keep going .....
Best wishes.
regards, dspp
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- Lemon Quarter
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Re: Company liquidation
Insolvency is not my field but your friend needs to be very careful that he is not 'trading whilst insolvent' as that can lead to personal liability for debts.
If the situation really is as bad as you say, I think he should be consulting an insolvency practitioner or his accountant, if he has one.
If the situation really is as bad as you say, I think he should be consulting an insolvency practitioner or his accountant, if he has one.
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Re: Company liquidation
>> 'trading whilst insolvent' as that can lead to personal liability for debts.
He's lucky in that he's got a backstop (me!) who can provide quite a bit in the way of emergency funds if he needs them, but obviously I'm not going to want to throw good money after bad indefinitely. So a question is: in that scenario (i.e. background emergency supply of funds if needed) does the term 'insolvent' still apply - i.e. is trading insolvently about the viability of the business generally in his view as a director, or is it only about the actual ability to stump up cash?
Second question: he will of course have to get an insolvency practioner involved (and I'm guessing the costs for that alone are not insignificant) but how is a commercial landlord in this situation likely to react, given that he's just signed a 5-year lease?
He's lucky in that he's got a backstop (me!) who can provide quite a bit in the way of emergency funds if he needs them, but obviously I'm not going to want to throw good money after bad indefinitely. So a question is: in that scenario (i.e. background emergency supply of funds if needed) does the term 'insolvent' still apply - i.e. is trading insolvently about the viability of the business generally in his view as a director, or is it only about the actual ability to stump up cash?
Second question: he will of course have to get an insolvency practioner involved (and I'm guessing the costs for that alone are not insignificant) but how is a commercial landlord in this situation likely to react, given that he's just signed a 5-year lease?
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- Lemon Half
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Re: Company liquidation
adriangs wrote:>> 'trading whilst insolvent' as that can lead to personal liability for debts.
He's lucky in that he's got a backstop (me!) who can provide quite a bit in the way of emergency funds if he needs them, but obviously I'm not going to want to throw good money after bad indefinitely. So a question is: in that scenario (i.e. background emergency supply of funds if needed) does the term 'insolvent' still apply - i.e. is trading insolvently about the viability of the business generally in his view as a director, or is it only about the actual ability to stump up cash?
Second question: he will of course have to get an insolvency practioner involved (and I'm guessing the costs for that alone are not insignificant) but how is a commercial landlord in this situation likely to react, given that he's just signed a 5-year lease?
See https://www.gov.uk/government/publicati ... -insolvent
If he is the sole company director (with say a co sec) and he thinks that you will give him money to pay the debts as they fall due then he is (imho) OK. If however you + he were joint co dirs and you know you will pull the plug, then from the moment that you make that decision (but don't tell him) then you are personally liable (but the chances of that ever being provable are unlikely). If on the other hand you wrote it into a board minute, but then you both carried on trading, then you'd both be liable ... The individual circumstances and details do matter.
This area is a minefield and if it is a ltd co of the scale you are suggesting then getting professional advice of a high quality is not cost-effective. And in any case it is not advice that will save the situation, it is just advice that allows you to put a more exact time of death on the death certificate. The real issue is whether the business can be turned around, and if so, how.
If there is a realistic chance of stretching things through to a trading upturn (or until a cost reduction can be organised, or something else) then there can be in some circumstances grounds to try and do that (and given many shops' reliance on seasonal trade that is exactly what goes on, ditto holiday tour companies etc). If on the other hand it is unrealistic to expect an uptick (etc) then better to fold early.
If at all possible it is better to cease trading whilst still solvent, then to end up in an insolvent liquidation. Put it down to learning and move on, wiser. The aim of the game in a new venture is to carry out the minimum viable experiment, then fold quick if you get the wrong outcome.
I am an engineer, not an insolvency practitioner, so please don't consider anything I say as more than just random opinion. But I have had a lot of experience at the nitty gritty end of this running UK factories.
regards, dspp
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- Lemon Pip
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Re: Company liquidation
He needs to check if he has given any personal guarantees on the lease.If he has he may be stuck with paying that for 3 years anyway or until the shop is re-let
Paul
Paul
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- Lemon Half
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Re: Company liquidation
adriangs wrote:... and what happens about the business rates?
It might depend on the Council and the business involved but see:
https://www.gov.uk/apply-for-business-rate-relief/hardship-relief
In England, councils can reduce your business rates bill with hardship relief.
To be eligible, you must satisfy your council that both:
you would be in financial difficulties without it
giving hardship relief to you is in the interests of local people
More generally is the company aware of the various reliefs, what is the rateable value and is the business by any chance a shop, restaurant, café, bar or pub?
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Re: Company liquidation
>> More generally is the company aware of the various reliefs, what is the rateable value and is the business by any chance a shop, restaurant, café, bar or pub?
It's a fitness studio. Unlikely to be eligible I would have thought, but I might be wrong.
It's a fitness studio. Unlikely to be eligible I would have thought, but I might be wrong.
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Re: Company liquidation
>> The real issue is whether the business can be turned around, and if so, how.
Well the thing is, it *might* be possible. It is seasonal, although in many ways January is the best time for fitness studios (new year resolutions etc.) and it's the expectations of that that haven't been met. But the business is growing by a tiny amount (1%) each month.. it's just whether that's enough.
Well the thing is, it *might* be possible. It is seasonal, although in many ways January is the best time for fitness studios (new year resolutions etc.) and it's the expectations of that that haven't been met. But the business is growing by a tiny amount (1%) each month.. it's just whether that's enough.
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- Lemon Quarter
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Re: Company liquidation
Also bear in mind that if you get too involved and are perceived as acting like a director of the company, you can be classed as a 'shadow director' and end up with the same liabilities as if you were a director. That maybe a bit dramatic if this is all as small and low key as you suggest, but as others have said, if there is no realistic prospect of the business becoming successful it is better to pull the plug now.
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Re: Company liquidation
>> Also bear in mind that if you get too involved and are perceived as acting like a director of the company, you can be classed as a 'shadow director' and end up with the same liabilities as if you were a director. That maybe a bit dramatic if this is all as small and low key as you suggest, but as others have said, if there is no realistic prospect of the business becoming successful it is better to pull the plug now.
Top <<
Useful to know, thank you.
Top <<
Useful to know, thank you.
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- Lemon Quarter
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Re: Company liquidation
Has he checked if small business rates relief might apply and has he claimed it? It may be RV is too high but given a start up not sure how many landlords would have leased him a larger unit at outset without guarantees and/or decent deposit, so worth checking as often missed.
https://www.gov.uk/apply-for-business-r ... ate-relief
If he cannot make it work with existing business can he, subject to landlord consent, find someone in similar line to "share" premises?
https://www.gov.uk/apply-for-business-r ... ate-relief
If he cannot make it work with existing business can he, subject to landlord consent, find someone in similar line to "share" premises?
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Re: Company liquidation
>> If he cannot make it work with existing business can he, subject to landlord consent, find someone in similar line to "share" premises?
Also worth thinking about - thank you
Also worth thinking about - thank you
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