The Liquidation Life Vest – What steps can you take to avoid your company’s liquidation?
It has been all over the news recently, large companies going bust. From Channel 10 to Topshop, no one is immune from market pressures. If your company is facing cash flow problems and you are dogged by endless creditors chasing payments, then the thought of company liquidation is both a real and frightening possibility. So what can you do about it? You could just let the liquidation process take its course, however you risk your decisions as director being criticised and debts being attributed to your personal property. Alternatively, you can seek legal advice early on to get your business back on track or prepare it for a smooth winding up process.
What is company liquidation?
The formal insolvency procedure, company liquidation results in a company’s trading being brought to an end. As part of this process all the assets of the company are sold and any proceeds are used to pay the liquidation fee and as much of the creditor debts as possible.
Why should I avoid company liquidation?
Aside from the time, energy and opportunities you will have wasted if liquidation occurs, there are also potential negative legal repercussions.
Once a company has gone into liquidation the liquidator has a legal obligation to investigate actions of the directors. As part of this process a director may be banned from acting as a director of another company or worse, be held personally accountable for some or all of the company’s debts.
A director can be liable for the debts of the company if it can be shown that they had not acted in the best interest of creditors, conducted wrongful trading or traded whilst insolvent.
Company liquidation can also damage a business’s reputation and brand recognition. This can be at the expense of many years of marketing and good will and prevents the directors from ever trading on that name or a similar name in the future.
What can you do to prevent liquidation?
- Understand your financial position
It is important to begin the process by taking time to look over your current assets and identify any potential cash flow issues. There is no point in trying to fix a problem when you are unsure exactly how large or pressing that problem is.
- Pick the profitable sales over unprofitable sales
If your business works in high cost items such as property or vehicles, consider whether or not you can sell items in order to release their monetary potential. In many cases you may be able to sell. If your company has a fleet of work vehicles, consider selling them and hiring for a short time. This may provide enough cash flow to pay looming creditors.
Similarly, continue to stay true to your business value. In cash strapped times it is easy to say yes to anything you think could bring in revenue. The risk remains that you may underquote, waste your time or create further issues if the job taken is not in your usual skill set or suitability. The better alternative is to go back to step one, review your balance sheet and place more energy in your true profit-drivers.
- Identify the weakest link
Cutting your losses is more than a turn of phrase. Once you have pinpointed your profitable sales, then it is time to review the business structure in more depth. This can include reviewing staff satisfaction, pricing models or periods of low productivity that can be avoided. By reviewing your processes and staff structure, small problems can be fixed, often resulting in large savings.
- Know when to get help
Running your own business can be isolating and stressful, particularly where there are cash flow issues. Few people seek legal advice before it is too late for their business and the process of winding up has commenced. By speaking to a lawyer, an accountant and/or an insolvency practitioner you can get the benefit of experience and create new solutions including:
– Negotiations with key creditors and stakeholders.
– Finance or re-finance.
– Re-structuring; and
– Business turnaround strategies.
If preventing liquidation is not possible, at the very least advice can be given about how to make the process as simple as possible and what liabilities you may face personally, if any.
Here at Lynn & Brown we have a team of dedicated commercial lawyers to give you the most up to date advice on how to structure your business, negotiate with creditors and ensure any contracts entered are favourable to you. If your business is struggling, or you want to set up good foundations to ensure the best start for your business, please do not hesitate to speak to us.
About the author:
This article has been authored by Steven Brown who is a Perth lawyer and director at Lynn & Brown Lawyers. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.