It is understandable to assume that insolvency practitioners (IP) only deal with insolvent businesses. It’s what it says on the tin. But that isn’t always the case.
For example, on a regular basis, licensed IPs manage companies through the process of Members Voluntary Liquidation (MVL). This is the liquidation of limited companies which are solvent – where all creditors receive payment.
There are numerous reasons why a solvent company would liquidate including:
- The shareholders wish to remove their investment from the company.
- The directors of the company wish to retire.
- The company is no longer profitable but it is possible for the business to cease whilst ensuring a surplus to the shareholders.
- There has been a breakdown in the relationship between directors and/or shareholders of the company.
MVL’s are a low cost, tax-efficient way of withdrawing investments in a company where distributions are expected in excess of £25,000. Such distributions are subject to Entrepreneurs Relief at 10% (subject to a £10 million lifetime limit).
But there are other situations where an IP will be involved with viable businesses. Sometimes a sizable company will run into financial difficulties because of management issues – perhaps a key member of the management team is taken ill or dies. Or maybe the FD has a domestic crisis which takes him away from the company. The core business is viable but could easily run into serious problems if urgent corrective steps are not taken. Larger organisations are like oil tankers – they can take quite a bit of time to change direction.
In these situations, an IP can help the company buy some time and protect from creditor pressure until a solution is found. The long term solution may involve the involvement of outside investment, restructuring the company or indeed its finances. It could also involve introducing a specialist to work within the company – supporting the board in achieving that solution.
The change in circumstances may mean the current owners decide they want to withdraw their investment in the business. It could involve a management buy in (MBI) by an external purchaser or a management buyout by existing remaining management team (MBO). To achieve the best possible result the company should prepare to ensure it is attractive to investors. This is new territory for many directors and shareholders and both processes need input and assistance from specialists.
At Wilson Field, we have contacts with a variety of professionals whom we work closely with. As a result, we can introduce experts who can work permanently or temporarily until we achieve the objectives.