Can I Sell My Business If It’s Insolvent?

12/11/2019

Photo by Alice Pasqual on Unsplash

Most likely, you’re unfortunately here because your business has hit insolvency and you are thinking of selling. Or you are the forward-thinking type of person that plans for the worst. Either way, the short answer is:

Yes, you can sell your insolvent company.

If you’re in Hong Kong, it is likely that your business may be suffering owing to the protests, threat from the trade war and economic downturn. There is a plausible expectation that many businesses will feel the blow and go into insolvency. Dealing with selling a failing company is tricky and comes with a lot of pressure from creditors and suppliers, no matter the cause.

We’re aiming to ease this difficult process by helping you fully understand what you’re in for.

How to test if my business is insolvent

You may be facing financial problems, but how can you tell whether a business is officially labelled as ‘insolvent’? In Hong Kong, while there is no set-in-stone criteria for ‘insolvency’, it generally refers to when a company is no longer able to pay back its debts.

This can occur in the following situations:
  • The inability to pay, secure or compound the sum equal to or exceeding the debt to the reasonable satisfaction of its creditor 3 weeks past when it is due. Or if the creditor has evidence of a statutory demand requiring the company to do so.
  • Inability to complete an execution, either as a whole or as a part, or other processes issued on a judgment, decree or order of a Court favouring the creditor of your company.
  • It has been proved to the Court that your company is not able to pay back its debt and the Court has taken the contingent and prospective liabilities of the company into account when doing so.

Other tests for insolvency include the Balance Sheet insolvency test and the Cash-Flow insolvency test. Courts might also utilise these tests (such as in situation three above) to test for insolvency.

These two tests include: 

Balance Sheet Insolvency Test: When the company cannot pay off their debt due to a lack of assets.

Cash Flow Insolvency Test: A company cannot pay back its debts as they fall due.

If your company satisfies one of these criteria, it’s most likely that your business is insolvent.

Keep your options open

When faced with a difficult financial position, it is important to be aware of all the options that are readily available to you.

There are a variety of formal procedures available for businesses in trouble:

Scheme of Arrangement

A Scheme of Arrangement can prove a desirable option to insolvent companies. There is an unfortunate lack of formal insolvency processes within Hong Kong that are available in other jurisdictions such as the UK.

The regulations regarding Scheme of Arrangements are laid out within Section 166 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32 of the Laws of Hong Kong), which share many similarities to the ordinance’s UK equivalent. With this scheme, you (or whoever had control before the scheme was enacted) maintains control.

Typically in a court driven process, a Scheme of Arrangement would first require the Court to approve meetings of the different creditors and shareholders. However, this initial part of the process would, unfortunately, incur fairly hefty expenses for the business.

After this, the Scheme would entail the solicitors and an insolvency practitioner of the business to draft a proposal to ask for compromise in regards to the business’s debt. This is usually with the prospect of new ownership continuing the business’s functions. This proposal will be presented to the shareholders and creditors of the insolvent business. The compromise would also suggest that the creditors would receive less money than they initially expected. However, this is still a better option for them, as the other option would involve the business going through liquidation, in which there would be even less return available.

Winding Up

When all other options have been exhausted, the final stage would be to wind up your company. This involves selling off the assets in order to repay its debts. This would cease the trading of the business and liquidators would be assigned to start the liquidation process. This would also mean that any transfer of shares after the commencement would be void. However, the legal fees made this is an expensive process.

You can winding up in one of two ways:

Voluntary winding up: Where a creditors meeting is convened and the company is unable to provide a Declaration of Solvency.

Compulsory winding up: This is where a shareholder, creditor, or the company can file to wind up the company through a solicitor. If it does not violate the rules outlined in the Companies Wind Up Ordinance then the High Court would call for the winding up of the company.

Should I sell my insolvent business?

If liquidation is not for you but you’re not sure selling is for you, here are a few of the benefits:

  • When you transfer ownership and shares of the company to another person, they will need to take on the responsibilities of debt. In turn, allowing you to place the burden of dealing with creditors, debts and liabilities onto the new owner, and off your hands.
  • By selling, you would be able to keep control of the sale of assets – determining which price you believe is best.
  • Your employees’ will be able to keep their jobs.
  • Pesky and often heavy liquidation costs can be avoided (including but not limited to: hiring an insolvency practitioner, settling legal disputes, processing employee redundancy etc.).
  • The business will be able to save face in terms of relationships with investors and creditors despite being under new management.
  • The business would still be alive, up and running.

Tips for selling your business

Once you have decided to sell your business, here are a few points to help you start:

Sell your business before reaching insolvency

Are you are here because you predict your business will soon reach insolvency? It’s best to make the decision to sell now. This will attract more investors and the transfer of ownership could be much smoother before the process of formal insolvency occurs. There may also be current projects and contracts that may be developing that could cease when the business hits insolvency.

If your business is already in insolvency, these tips are for you:

Determine the root cause of the business’s failure

To attract investors and potential new owners, you should be honest why your business was not able to survive. This will allow the new owners to be able to amend or improve on the mistakes made when the business is under their control. Additionally, learning the cause of the problem allows the investors to feel more at ease when injecting finances. If they know there were errors that can be avoided the second time around, they’ll be more likely to invest. 

Provide honest financial data

When attracting new investors or owners, it is important to prepare accurate data of your business’s finances. This allows buyers to get acquainted with the progress and history of the business’s financial situation. This will allow them to have confidence in what they are investing in.

Feature the worth of your company

To ensure the best future for your company, it is desirable to captivate as many potential investors as possible. This is most easily done through the advertising of your company’s value and quality, and allow you to keep your options for selling openly.

In the end

Yes, you can sell your insolvent company. But it is best to inform yourself of all your options beforehand. And if ever you are in a tough spot, seek a legal consultant so that the information provided to you is best suited for your company and its particular needs.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

 

READ MORE: 6 Legal Dangers For E-Commerce Businesses To Watch Out For

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