Thinking About Closing Your Business? What Directors Should Know Before Taking Action
When a business has been under pressure for some time, the decision to close can feel like the only option.
You may be dealing with unpaid taxes, creditor pressure, declining profitability or the ongoing stress of trying to keep the business operating. It is understandable that many business owners reach a point where they want to sell the business, pay outstanding debts and move on.
However, before taking action, it is important to understand the potential consequences and obtain professional advice.
The decisions made before a liquidation or business closure can have significant implications for directors, shareholders and creditors.
Paying Creditors: The Order Matters
One of the most common misconceptions when closing a business is that directors can simply sell assets and pay creditors in whatever order they choose.
In an insolvency situation, creditors must be paid according to the priority rules set out in the Companies Act 1993.
The order of payment can be complex, and paying one creditor ahead of others may create issues later.
Certain payments made before liquidation may be reviewed by a liquidator and, in some circumstances, may be recoverable as insolvent transactions.
This means a creditor who has received payment may later be required to repay those funds to the company for distribution according to the correct statutory process.
Tax Debts Require Particular Attention
Tax obligations, including GST and PAYE, require careful consideration when a company is experiencing financial difficulty.
PAYE is particularly important because it relates to deductions made from employees’ wages that are held for payment to Inland Revenue.
Directors should not ignore outstanding tax obligations or assume they can simply be dealt with after other creditors have been paid.
Understanding the company’s tax position early allows directors to consider their options and responsibilities.
Shareholder Loans and Drawings May Need to Be Reviewed
Another area often overlooked when a company is struggling is the shareholder current account.
Where shareholders have taken more from the company than they have contributed, the company may have an asset in the form of an amount owing by the shareholder.
If a company enters liquidation, a liquidator has a responsibility to identify and recover company assets for the benefit of creditors.
This may include reviewing:
- Overdrawn shareholder current accounts.
- Loans to directors or shareholders.
- Transactions involving related parties.
Consider Your Options Before Making Decisions
Closing a business is not always the only option.
Depending on the circumstances, alternatives may include:
- Restructuring the business.
- Negotiating with creditors.
- Improving cash flow management.
- Selling the business.
- Selling parts of the business.
- Entering into a formal insolvency process.
The best option depends on the company’s financial position, future prospects and obligations to stakeholders.
Seek Advice Before Taking Action
When a business is under financial pressure, early advice can provide clarity and help avoid decisions that may create additional complications.
At Pryde Accounting & Advisory Limited, we help directors understand their position, assess available options and navigate financial challenges.
As a Chartered Accountant and Licensed Insolvency Practitioner, Hamish Pryde combines accounting expertise, commercial understanding and insolvency experience to provide practical advice when it matters most.
Seeking advice early is not an admission of failure. It is a responsible step that gives directors the best opportunity to understand their options, protect value and make informed decisions.
About the Author
Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.
Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited