How Does Liquidation Affect Your Other Businesses?

If you have multiple businesses and most of them are running successfully but, one of them is making a loss, struggling to meet its financial obligations and showing no sign of recovery; the sensible thing to do would be to liquidate that business and focus your time on growing the others, right? Maybe – but not in all cases and, certainly not before knowing all the possible consequences.

It is all too common for directors to place one business into insolvency only to realise that it can have a knock-on effect on your other companies within this group. This can create a domino effect that can spell disaster for businesses and directors alike.

Pre-Liquidation Checklist

If you are the director of multiple companies, there are several scenarios in which your other businesses could be affected by liquidation or other formal insolvency. These include:

Intercompany Loans: If One Business Has Borrowed From Another

This is one of the biggest oversights when it comes to liquidation. If you have several businesses or a group of companies, it is common that you may lend money from one company to another e.g. to cover start-up costs. Whilst there is nothing wrong with this, you have to remember each business is a separate entity. This means these loans must be treated like any other borrowing.

It also means that the insolvency practitioner (IP) appointed to oversee the liquidation of your business will view this as an asset to be recovered. In the event of liquidation, your other businesses could be forced to pay back money that they have borrowed. If they are unable to do this, they could even be forced into liquidation themselves. Ultimately, this could trigger a domino effect, causing multiple companies to collapse.

If You Could Be Disqualified As A Director

If your conduct as a director has not been to the required standards, you could be guilty of misfeasance. This essentially means that you have acted in a way that was detrimental to your business or its creditors.

Examples include taking loans falsely, paying yourself when the company is insolvent, failing to pay HMRC on time and many more scenarios. If this is the case, you will more than likely be disqualified from being a company director. This can last for up to 15 years. If this happens, you will have to resign as director of your other companies and will lose all control over them.

If You Have A Cross-company Guarantee

This is similar to a personal guarantee but is signed by one company to guarantee lending to another business. This is commonplace between companies within the same group, especially where a new company requires finance.

If one company enters insolvency, the company that has guaranteed the lending will be required to pay the full amount. Failure to do so will result in the business being forced into liquidation.

If You Cannot Pay Your Personal Guarantees

When you place a business into formal insolvency, you will become liable for any borrowing that you have personally guaranteed. If you can pay this, then you should face no issues. However, in the worst-case scenario, failure to pay this will result in you being made bankrupt.

If this occurs, you will not be able to be the director of any limited company during your bankruptcy. This also means you will lose control over any of your businesses. They can continue to run with an alternative director in charge but, repeated changes in management can be tumultuous for a business. This is often reflected in the balance sheet.

How To Liquidate Your Business Safely

Although this article may make it sound like you have no choice but to continue running your business, this is not the case. The best solution to any financial issue is always the informal one. By speaking directly to creditors, you may have a chance to restructure your business and continue trading.

If this is not possible, then it may be time to consider liquidating that business. However, the liquidation of one business has to be done in a prepared and controlled manner to avoid the impact on others. This involves forensic accountancy, consideration of your and your businesses’ financial history and an in-depth understanding of the insolvency process.

If you are worried about one of your businesses or are considering insolvency, speak to independent business insolvency experts first. Bell & Company have a team of specialists that can find you the best strategy and help to implement it.

Call us on 0333 305 4331, join the live chat below or request a call-back to speak to one of our team today.