Liability beyond liquidation!

It often comes as a surprise to clients when I talk about a company being an entity in its own right.?

You may own it and run it, and you may have built it up from being just a gleam in your eye to a multi million pound industry, but it still has it’s own separate life and personality.??It has its own assets and liabilities, the laws that apply to a company can be different from the laws that apply to you, and it can survive you.

I sometimes relate it to having children.?You can guide them, worry about them, encourage them and watch them grow, but eventually there comes a time when they are going to become independent of you.?If it’s a child, that usually means when they grow up and leave home.?If it’s a company, that might mean when you sell the company on to a new owner or just take on other shareholders and/or directors who will have a say in how the company is run and could outvote you.???

However, not unlike children, even when a company “leaves home” that isn’t the end of it.?The children will be back for food, washing and financial support.?Co directors/shareholders may need your support and advice as to how the company is run.?New owners may complain that you didn’t tell them everything they needed to know and try to enforce warranties you gave about the financial viability of the company.?Actually you could probably argue that that applies to companies sold and children who leave home alike.

But what about when a company goes into liquidation.?Can you assume that once the liquidator takes over, that’s the end of your responsibility as a parent to that company.

Well, if the answer was yes this would be a fairly short and pointless blog.

So obviously the answer is no.

When a liquidator takes over the company, that is possibly where the real fun begins.?Depending on the size of the company and (perhaps more importantly) the size of the debt, that is when your role in parenting that company could come under close scrutiny.?

Things a liquidator might look for include:

1. Was the company properly run – did you trade insolvent.
2. What has happened to the money – did you make any preferential payments or take dividends that the company could not afford.
3. What happened to the assets – did you transfer any assets to yourself personally or to a new company and if so, did you do this for value- if the company bought your laptop, then the company owns your laptop and you don’t have the right to take it with you when you leave.
4. Are there director loans outstanding – if so, you will have to repay it.

And if they don’t like what they find, you could be paying the price long after the company has ceased to exist and long after your children have got married, settled down and started having children and companies of their own.

Which might make you think that this advice is aimed more at people whose companies have already gone into liquidation.

However, whilst I can help people in those situations, I’m a great believer in prevention is better than cure.?There are plenty of things that you could and indeed should put in place at the time you take certain steps, that might give you protection at a later stage.?For example, if you decided to continuing trading even though it could be argued that you were insolvent, holding a board meeting, putting it to the board that you should continue, having notes of the meeting and a resolution could give you huge protection.?Similarly, if you take an asset home, such as a laptop that the company bought, having records to show that the computer was actually broken or that it was part of your contract of employment that you were able to keep the computer after a set number of years could go a long way to assuring a liquidator that nothing untoward has happened.

You might be tempted to do all of these things at the end, but the time the company has gone into liquidation you may find that it’s too late.?Even if you put things together a few weeks or even a few months before the inevitable happened, Liquidators are good at spotting documents that have been put in place retrospectively.?So the best way to do it is as you go.?For example, if you want the right to keep your laptop, put a contract of employment in place now.?It may seem strange to have a contract between yourself as the sole employee of the company and yourself as the sole owner of the company, but it’s really no different from having a text exchange with your children reminding them what time their curfew is.?You all know what their cut off time is, but if you’ve got evidence of what was agreed, they can’t argue that they misheard you.?Selective hearing in your offspring can be just as dangerous as liquidators who are not willing to take your word for something.

Kleyman & Co Solicitors.?The full service law firm.?Advice on law and parenting.