Updated: 8th February 2021
Liquidation means that company assets are sold and the proceeds paid out to creditors in repayment or partial repayment of their debts. These assets are commonly sold at auction, after the liquidator has established their fair market value.
One of the liquidator’s duties is to make sure creditors receive returns that are as high as possible, so they will take steps to have the company’s assets professionally valued so as to maximise repayments.
But who might purchase the assets of a company in liquidation? It may be someone setting up a brand new business, or directors of a company that needs a certain type of asset such as office equipment or a vehicle.
In some cases a company’s competitor may purchase one or more of its assets in a liquidation sale, or unconnected third parties may benefit from buying assets in this way. There are a variety of potential purchasers in this situation, not least of which is the directors of the company being liquidated.
So how is it possible for directors of a liquidated company to purchase its assets, and what is the procedure?
When a company undergoes insolvent liquidation the office-holder is obliged to generate as much money as possible for creditors from the sale of assets. For this reason, they can take into account a director’s interest in repurchasing the company’s assets during or following liquidation.
There are certain requirements before this type of transaction can take place, however, and one of the most important issues in this situation is having the asset(s) in question professionally valued.
Establishing a fair market value prior to sale is fundamental to the process, and ensures that creditor losses are minimised. A professional valuer will be hired by the liquidator to determine the value of each asset prior to it being put up for sale at auction, or with a view to being purchased by a director.
But why might you want to buy back company assets when your business is being liquidated?
You may have plans to move on and become director of another existing business, or perhaps set up a ‘newco’ – a brand new business that can use the assets that are for sale. An example of this is where a construction company becomes insolvent before a contract is complete, and the directors set up a new company.
Buying back the assets of the old company, such as cement mixers and JCBs, enables the ‘newco’ to operate efficiently, and the transition can be more or less seamless. As long as the purchase price isn’t lower than the professional valuation, the transaction can go ahead.
Stringent insolvency laws exist in the UK to protect creditors of failed businesses. This is why when a company is liquidated the office-holder investigates its directors to make sure misconduct isn’t a factor in the business’ failure.
If company assets are bought back at below a fair market value, it is regarded as an ‘antecedent transaction’ and can be reversed by the liquidator. When purchasing assets of your failed company with personal funds the transaction must be carried out during or after liquidation, and not before the liquidator has been appointed.
If such a transaction has been made beforehand, it will be identified by the liquidator during their investigation into the circumstances of the company’s failure. The transaction will be reversed, and your actions could result in allegations of misconduct.
It’s highly advisable to seek professional insolvency advice if you want to buy back any of your company’s assets with your own funds. When the liquidator is appointed they will take control of the company and ensure that a fair value is attached to each asset.
Real Business Rescue can provide further help and advice if you’re unsure how you stand as a director in this situation. We offer free same-day consultations and operate a broad network of offices nationwide.
13th October 2021
The Bank of England has said it anticipates that rates of corporate insolvency will increase in the coming weeks following the removal of restrictions on winding up petitions.Read More