Businesses sometimes fall into insolvency despite our best efforts. You can still sell your business though, even if it’s insolvent. Selling your business is almost always a more attractive option to liquidation. Small businesses especially benefit from selling, as they avoid costly voluntary administration.
For more information on what insolvency is – click here
When selling your insolvent business there are a few things to be aware of. This blog post will cover them.
Benefits of Selling
- Keeps your employee’s jobs;
- Avoids voluntary administration and/or liquidation costs;
- You stay in control of asset sales, letting you bargain for a better price;
- Selling keeps your image intact amongst creditors, competitors and friends
- Selling may keep the company alive and trading, albeit under new management
For more information on why selling might suit you, contact a company lawyer.
Selling to a Related Party
As defined by section 228 of the Corporations Act 2001 (Cth), the related party includes:
- The Director(s) of the Public Company;
- Director’s spouse, relatives and even spouse’s relatives;
- Entity controlled by a related party (e.g., Director of selling company is also Director of buying company).
Companies must follow certain rules for related party transactions. All transactions must be for fair value and include arm’s length terms.
Fair Value
- Business or company sales cannot be nominal, should be bargained for, should be independently assessed and must be at market price;
- All sales must be for the business’s best interests, especially if said business is a company and as such is a separate legal entity.
Arm’s Length Terms
- Transaction terms should not differ wildly from similar arm’s length transactions;
- Were there other more favourable options available that a non-related party would follow;
- Was independent expert advice sought when selling company;
- Were there protocols in-place to inform board members, associated and non-associated parties.
Illegal Phoenixing
When insolvent businesses sell their assets to avoid paying debts to creditors and tax to the ATO (Australian Tax Office), this is illegal phoenixing. Although illegal phoenixing is not detailed in the Corporations Act 2001 (Cth), Directors who engage in illegal phoenixing are punished for breaching their company duties. Punishments are either fines, imprisonment or both. The Corporation Act 2001 (Cth) outline these duties, which include:
- Acting in Good Faith
- Proper use of Position
Acting in Good Faith
Directors or business owners make the company’s decisions. The Corporations Act 2001 (Cth) therefore requires directors to act honestly and within the company’s best interests. Selling to an unrelated party does not break this duty, but selling out of personal interest and for an uncommercial price is.
Proper use of Position
Directors must always act for the company. Directors must resolve conflict in the company’s favour, not their own. Sometimes a director will act for the company, which is also acting within the director’s interest. If the directors would not have acted, but for their personal interest, then this is a breach.
To Sell or Not to Sell
There are key benefits to selling your insolvent company or business. You can avoid costly administration and reputation damage from going into liquidation. However, selling your insolvent company can be hard, there are many legal questions to consider. Legal advice needs to be obtained before going down this path.
For further assistance, you should contact a company lawyer, who will assess your situation and recommend the best business structure to use.
Need help selling your insolvent business or company? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
