Most company directors will have the option to dissolve an insolvent business and start again with a fresh venture.

This new business could be similar to the defunct company (subject to certain restrictions) or branch out into a totally different sector.

But any director that’s seriously thinking about this course should be aware of several important implications.

Liquidating your existing firm

Liquidation involves selling off a company’s assets and using the revenue to settle debts.

In certain cases, the new company might be able to acquire assets from the old company, but these transactions must occur at a fair market value, determined by an independent valuer.

Phoenix company rules

A ‘phoenix company’ rises from the ashes of an insolvent business, allowing directors to transition their business – but not their debts – to a new legal entity. While ‘phoenixing’ is generally legal, specific restrictions are designed to stop director abuse.

For instance, insolvency law constrains the reuse of a company’s registered and trading names for five years.

HMRC security deposit

If a company owes substantial tax debts to HMRC, the tax authority might request a security bond or deposit from the new company.

This additional safeguard for HMRC could present an obstacle to launching a new company.

Personal debt guarantees

Sometimes, lenders require a personal guarantee from directors or shareholders when loaning to a company.

This means a debt might not simply disappear following a company’s liquidation, and directors might still be responsible for outstanding amounts.

Director disqualification

If a company is involved in insolvency proceedings, the Insolvency Service may investigate directors to check if they met their legal requirements of running a company.

If the Insolvency Service decides they haven’t met their legal responsibilities, the director can be banned which would prevent them from starting a new company.

Relationships with lenders and suppliers

If a company’s closure results in significant losses for lenders and suppliers, a new venture with the same directors could face challenges in securing loans or forging deals with suppliers.

Credit checks on the new company will reveal previous financial difficulties for the directors.

Hiring an insolvency practitioner

Every company liquidation must be overseen by a licensed insolvency practitioner. They will manage the liquidation process, make sure everything is carried out fairly, and explore possibilities for directors to establish a new enterprise.

For more information, speak to a member of the Umbrella.UK Insolvency team today. Call: 0800 611 8888.