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Personal liability threat for directors who want a second attempt
Article date: 05/10/2009
A leading insolvency lawyer has given a warning of increasing risk for directors who buy back their failing business.
David Ellis, head of the insolvency team at Higgs & Sons, believes many directors are not aware of complex technical requirements when purchasing the business and re-using the original trading name.
"A major phenomenon of the current recession is the rise of the 'pre-pack', which is the quick sale of a company's business out of insolvency; often to its previous officers," explains David.
"This type of sale has its critics, however in many cases a sale to the old management team provides the best outcome for the creditors as the former directors know the customers and suppliers better than anyone. They also probably know why it failed and should be best placed to avoid falling into the same trap twice.
"Where many trip up, however, is if they want to re-use the trading name of the old company. The previous management team are at risk if they fail to comply with the complex technical requirements concerning the re-use of this trading name."
Many directors are not aware of the requirements and are committing a criminal offence (for which imprisonment is a possibility) as well as exposing themselves to significant personal liability.
David says: "Directors are accepting personal liabilities for all the debts of the buyer in the event that it should fail in the future. This arises from the unfortunate effect of s217 Insolvency Act. Many directors will not be made aware of those provisions at the time they buy the business back from the insolvency practitioner especially if they have paid for the goodwill and the right to use the trading name. The first that many will know about the potential problems is if the buyer fails and the directors are then asked to pay all the buyer's debts."
Directors who buy the business back in these circumstances must give notice of the purchase within a strict 28 days time limit. This should be sent to all the creditors of the insolvent company as well as being advertised in the London Gazette.
If such notice has not been given within this time it may still be possible to take advantage of other exemptions in the Insolvency Act; for example by applying for a court order however the costs are greater if they make such application.
"In the circumstances directors wishing to buy back the business should either use an unconnected trade name, or they should take advice from a solicitor at an early stage in order to limit these risks," concludes David.
For more information about Higgs' insolvency department contact David Ellis on 01384 342100.
Further information: Hazel Crawford-Upton, Connect PR, Tel: 01902 714957 Email: firstname.lastname@example.org.