Can You Sell An Insolvent Company To Avoid Liquidation?
Fast Fact
Can You Sell an Insolvent Company to Avoid Liquidation? No, you cannot sell an insolvent company to avoid liquidation. You can sell shares in an insolvent company but you cannot avoid liquidation by doing do so.
Insolvency Avoidance Scheme
Selling an insolvent company will involve selling the shares in the company. There is no barrier to that except what is in the company constitution, ie. its Articles of Association. However, merely selling your shares in a company, resigning as a director does not necessarily avoid liquidation.
Avoiding liquidation if a company is insolvent is often inappropriate and can be improper if it is attempted deliberately as a means to avoid having to deal with or face creditors.
Using an insolvent avoidance scheme which may involve selling shares, changing directors, taking the assets and failing to preserve company records is a recipe for potential trouble and subsequent investigation, conceivably by the Insolvency Service, as it will likely involve a breach of director’s duties.
Company Closure Without Liquidation
When a company becomes insolvent (unable to pay its debts or with liabilities exceeding its assets), directors concerned about being investigated may look for alternatives to liquidation.
There are alternatives such as voluntary strike off. However, that process is often not available to an insolvent company if creditors object to it or apply to the court for compulsory liquidation.
What You Need To Know
Insolvency in itself is not unlawful. Indeed, the most common form of liquidation is creditors voluntary liquidation, which is authorised by the Insolvency Act 1986. However, once a company is insolvent, directors have a duty to act in the best interests of creditors, not shareholders. This is known as the Creditor Duty.
It is possible to sell an insolvent business, but there are strict legal guidelines. Any sale must be transparent, commercially justifiable, and supported by independent valuation. If these principles are ignored, directors could face personal liability for wrongful trading or face investigations by the Insolvency Service.
Risks of Getting It Wrong
Selling an insolvent company without professional advice can backfire. Common issues include:
Transactions at Undervalue: If you sell assets for less than their true worth, a liquidator could reverse the transaction.
Preference Claims: If you favour one creditor over others before the sale, this could be legally challenged.
Director Conduct Scrutiny: If the sale appears designed to avoid liabilities or benefit directors unfairly, you could be subject to disqualification or other penalties.
How We Can Help
If your company is struggling, we can help you assess your position, evaluate all options, and take action that protects your company.
Get In Touch
At Fast Liquidation, we work closely with business owners facing financial distress, helping them explore legitimate options.
Contact us today for a confidential, no-obligation consultation.