There are a number of alternatives to putting your company into liquidation. Anything from informal arrangements with creditors to voluntary administration and a deed of company arrangement can prove to be a viable option, keeping your business from closing and you, as a director, from potential bankruptcy.

Can you sell a company to resolve significant debts?Can you sell a company's business to resolve significant debts?

One such solution is to restructure your business through a sale to another company. We have given this process and the important considerations an overview before, but how does it work in detail? Let's run through it, to help you understand exactly what the sale or restructure involves.

When is a sale or restructure appropriate?

This is a process wherein your company sells its business and/or its assets to another party, with the proceeds going to the company and its creditors. Where a viable business cannot continue operating in the existing structure, greater value may be achieved for creditors by selling the business to another entity, rather than closing it down, firing its employees and appointing a liquidator. As such, it is an option that should be properly considered when debts are not being paid and insolvency is looming.

A sale of business might not solve all of the potential issues such as directors being liable for personal guarantee debts and Australian Taxation Office Director Penalty Notices, profitability and cashflow measures need to be addressed and the purchaser, particularly where it is a related company of the director, needs to have sufficient funds available to pay fair value to purchase the business. This is a serious situation, but one that can be addressed with proper consideration of the law, commercial factors and proper process.

How to restructure or sell your business

The focus should be on your core business and its primary assets.

The focus should be on your core business and the assets and ancillaries required to run that part of the business that is viable. These should all be accounted for if a business is sold on to a separate entity – which can be a related party. This can include staff, rental agreements, real estate, plant and equipment, and intellectual property.

A sale may not include the purchase of every single part of the company. Crucially, this must be a commercially sound transaction focussed on ensuring the sustained profitable trading of the continuing business. Assets must be purchased at fair value, lest it verge on illegal phoenix activity. Using the right pre-insolvency, financial and legal professionals will be necessary. Beware there are many unregulated advisers that are not actually qualified to assist with this process and you risk being sued and criminally prosecuted if you breach your duties as a director.

What happens next?

Once the sale of the existing business is settled, a liquidator will often be appointed to wind up the initial company if it is insolvent or has outstanding debts. However, the sale to a financially sound company can leave the debtor company in a better position, mitigating against insolvent trading and providing a better outcome for its creditors.

This is a tricky process to walk through, both financially and legally – it must be done exactly right and everything must be purchased fairly. To find out more about a sale of business, get in touch with the experts at Cactus Consulting. 

Posted on 25-11-16 in Business insolvency, Corporate liquidation.