Managing the shut down of a small company on retirement?

[torblednam]

I've been asked for advice by a family friend about something a bit outside my core area of knowledge, and I'd be grateful for informed opinions from anyone who can take the time to read this...!

The situation is as follows:

• Small Ltd company (involved in supply and installation of specific types of machinery / equipment),
• 35 years in existence,
• Just the owner / director and one employee, who has been with him since early days, say 32 years.
• Owner is hitting 70, drawing his own private pension and the OAP, and now he's looking at the inevitable winding down of the business in the next couple of years, as (to quote Danny Glover in that classic of modern cinema, Lethal Weapon,) he's getting too old for this ....!
• The company has no real assets or money worth talking about - just a modest amount of working capital (some tools, stock and a van that's a few years old).

The owner would be happy to hand over the reins and sign ownership of the company over to the employee, but the employee has said he has no interest in that (as I understand it, he'd prefer to just receive €40k in statutory redundancy).

As a going concern, the company is viable and solvent, generating enough work and income for the director and employee, but the realisation that he won't be able to hand over the company to the employee, means that the only "way out" for the owner, is to wind the company up in due course.

So this brings me to the critical issue:

• But for the latent redundancy cost of €40k the company is solvent and could otherwise shut up and do a MVL in the morning.
• However, once a decision is made to pull the plug, the redundancy cost (and associated creditor in the form of the employee) kicks in, so I presume that makes the company ineligible for a MVL?
• This means the only orderly winding up is via a CVL - in this case, is it sufficient for the owner to just allow the company to continue to trade, paying everyone (suppliers, Revenue, employee) what they are due, up to a point in time, and then just suddenly decide to say "OK, stop the bus, I'm old and tired, and I'm getting off now!" leaving the employee as the only creditor?!
• The other alternative is an "unorderly" winding up, whereby the company just ceases trading, pays the employee some redundancy, based on the cash reserves available (and presumably leaving room for the balance to be paid out of the Social Insurance fund), and the company is allowed to fall off the CRO. The owner could potentially be liable to some limp-wristed ODCE sanctions, but he isn't particularly perturbed by this.

Am I missing anything obvious?

And finally, am I correct in thinking that if this business was conducted through a sole trade, the proprietor would be personally liable, after keeping someone else in a job for 30 years, to the full cost of that person's statutory redundancy? If so, it's a pretty big advantage to incorporation that I don't remember anyone ever talking about.

 

[Brendan Burgess]

Hi mandlebrot

I have seen similar problems.

A good employer who treats their employees well ends up with a huge liability for redundancy.

Bad employers with a high staff turnover don't face this problem.

He has to be careful that he does not trade while insolvent or else he could be made personally liable.

His best bet is to talk to someone like Jim Stafford.

What age is the employee? Is he approaching retirement?

Brendan

 

[torblednam]

Hi mandlebrot

I have seen similar problems.

A good employer who treats their employees well ends up with a huge liability for redundancy.

Bad employers with a high staff turnover don't face this problem.

He has to be careful that he does not trade while insolvent or else he could be made personally liable.

His best bet is to talk to someone like Jim Stafford.

What age is the employee? Is he approaching retirement?

Brendan

Thanks Brendan.

No, the employee served his time as an apprentice with him so I suppose he'd be early 50's.

The bit about trading while insolvent is what has my brain hurting, since the liability to pay redundancy only arises at the point when you decide you're stopping trading...

 

[Brendan Burgess]

since the liability to pay redundancy only arises at the point when you decide you're stopping trading...

That is why a good insolvency practitioner will answer the question very quickly.

Brendan

 

[Baby boomer]

I've often wondered about this. Essentially, an employer accrues a contingent liability of €1200 for every year worked by every employee.
Strictly speaking, should this not be shown in a company's accounts and/or held as a provision against the liability being realised?

Or, I suppose, it could be argued that the employer's insolvency fund effectively "insures" the company against being unable to pay due insolvency.

 

[Jim Stafford]

Hi Torblednam

You have summarised the issues well.

It is a very topical issue, as many business owners are currently assessing their options post Covid, and deciding to retire/sell now, given the very real prospect of losing money going forward.

I suggest that your family friend proceeds as follows:

• Sit down with the employee and present him with 2 options. Firstly, Redundancy. Prima Facie, this might seem very attractive to the employee. However, the employee should be asked to consider where will he be in, say , 2 years time, when his redundancy money is spent. Will he be able to obtain another job, given his age etc? If the employee believes that he will obtain another well paid job, then the best option is for him to wait for his redundancy. The second option is that your friend sells his shares for a nominal value, and stay on as a consultant for a short while etc
• Consider selling/merging the business to another company servicing the same customer base. Whilst many companies would be reluctant to take on an employee with accumulated redundancy entitlements, some companies might see the company's existing customer base as a platform to sell other products etc
• He seems to have a niche servicing specific machines. He should consider approaching the distributors of the machines to determine whether they would take on the business, on the basis that if they don't another competitor might gain market share.

However, once a decision is made to pull the plug, the redundancy cost (and associated creditor in the form of the employee) kicks in, so I presume that makes the company ineligible for a MVL?

Correct.

This means the only orderly winding up is via a CVL - in this case, is it sufficient for the owner to just allow the company to continue to trade, paying everyone (suppliers, Revenue, employee) what they are due, up to a point in time, and then just suddenly decide to say "OK, stop the bus, I'm old and tired, and I'm getting off now!" leaving the employee as the only creditor?!

Yes, that is a valid option. As long as he continues to act "honestly and responsibly" he should have nothing to fear.

The other alternative is an "unorderly" winding up, whereby the company just ceases trading, pays the employee some redundancy, based on the cash reserves available (and presumably leaving room for the balance to be paid out of the Social Insurance fund), and the company is allowed to fall off the CRO. The owner could potentially be liable to some limp-wristed ODCE sanctions, but he isn't particularly perturbed by this.

He should be perturbed! i have seen cases where ODCE have disqualified directors for allowing a company to be struck off whilst it had liabilities.

Jim Stafford

 

[Brendan Burgess]

Jim

That is a very comprehensive answer. Thank you very much.

The second option is that your friend sells his shares for a nominal value, and stay on as a consultant for a short while etc

OK, so sell the shares to the employee to the employee I presume? And then resign as a director.

Is that risky for the existing owner?

If the employee messes it up and the company becomes insolvent, could the former director become liable?

Brendan

 

[Jim Stafford]

If the employee messes it up and the company becomes insolvent, could the former director become liable?

This type of case is a million miles away from, say, the Philip Green case, where Mr. Green sold BHS for £1 to an individual who was a discharged bankrupt. Provided the owner acts "honestly and responsibily" up to the date of sale he should have nothing to fear from.

Jim Stafford

 

[torblednam]

Hi Torblednam

You have summarised the issues well.

It is a very topical issue, as many business owners are currently assessing their options post Covid, and deciding to retire/sell now, given the very real prospect of losing money going forward.

I suggest that your family friend proceeds as follows:

• Sit down with the employee and present him with 2 options. Firstly, Redundancy. Prima Facie, this might seem very attractive to the employee. However, the employee should be asked to consider where will he be in, say , 2 years time, when his redundancy money is spent. Will he be able to obtain another job, given his age etc? If the employee believes that he will obtain another well paid job, then the best option is for him to wait for his redundancy. The second option is that your friend sells his shares for a nominal value, and stay on as a consultant for a short while etc
• Consider selling/merging the business to another company servicing the same customer base. Whilst many companies would be reluctant to take on an employee with accumulated redundancy entitlements, some companies might see the company's existing customer base as a platform to sell other products etc
• He seems to have a niche servicing specific machines. He should consider approaching the distributors of the machines to determine whether they would take on the business, on the basis that if they don't another competitor might gain market share.

Correct.

Yes, that is a valid option. As long as he continues to act "honestly and responsibly" he should have nothing to fear.

He should be perturbed! i have seen cases where ODCE have disqualified directors for allowing a company to be struck off whilst it had liabilities.

Jim Stafford

Thanks very much for taking the time to reply Jim.

On the last point, when I say he's not perturbed it's because he's aware of the potential sanctions but at his age and stage of life disqualification from acting as a director is of no consequence to him.

With no offence to the noble profession of liquidators, the unorderly route looks like the simplest and most cost effective one for him to take.

 

[Jim Stafford]

With no offence to the noble profession of liquidators, the unorderly route looks like the simplest and most cost effective one for him to take.

If he does not mind:

1. Being possibly served with legal proceedings by the Department of Social Protection for recovery of the redundancy monies,​
2. Being possibly brought to Court and fined by the Companies Registration Office for failure to file annual returns,​
3. Being fined by the Revenue Commissioners for non-filing of returns,​
4. Possibly losing his pension scheme if the company is struck off​
5. Possibly receiving registered letters from the ODCE seeking his disqualification etc​

Then the option of not liquidating option might suit him. However, the better option might be to use the company's remaining assets of Debtors etc to pay for a liquidator to carry out an orderly winding up.

Jim Stafford

 

[torblednam]

If he does not mind:

1. Being possibly served with legal proceedings by the Department of Social Protection for recovery of the redundancy monies,​
2. Being possibly brought to Court and fined by the Companies Registration Office for failure to file annual returns,​
3. Being fined by the Revenue Commissioners for non-filing of returns,​
4. Possibly losing his pension scheme if the company is struck off​
5. Possibly receiving registered letters from the ODCE seeking his disqualification etc​

Then the option of not liquidating option might suit him. However, the better option might be to use the company's remaining assets of Debtors etc to pay for a liquidator to carry out an orderly winding up.

Jim Stafford

Maybe I misinterpreted what you said initially but:

1. I had understood that he (the individual) wouldn't be personally responsible so long as he had acted "honestly and responsibly" up to the date that (for example) the doctor told him he would have to stop working...

2. I understand that the ODCE aren't initiating proceedings in relation to lower level breaches of the type involved. (From their 2018 annual report:
Summary criminal proceedings
As has been set out in detail in previous Annual Reports, in recent years the Office has made a conscious policy
decision to devote less resources towards pursuing criminality on the less serious end of the spectrum in
favour of concentrating its resources on investigating more serious indications of wrongdoing. Consistent with
that repositioning policy, the Office did not initiate any summary prosecutions during the year.)

3. The intention would be for everything to be filed up to date of cessation, beyond that point Revenue won't care, they're busy enough dealing with live entities than zombies with no tax debts.

4. Pension isn't a company scheme.

5. This is not something that would concern him.

So it seems to me, point 1 is the only real and material concern. He'll have to know what is required of him and act accordingly, if he chooses not to go the route of a CVL.

 

[Jim Stafford]

. I had understood that he (the individual) wouldn't be personally responsible so long as he had acted "honestly and responsibly" up to the date that (for example) the doctor told him he would have to stop working

To clarify, as long as he acted "honestly and responsibly" up to the date of liquidation he should not have any issues. However, if he wishes to breach the Companies Acts by failing to file Annual Returns, not placing the company into liquidation etc, then he is exposing himself to possible legal action by CRO and ODCE. His failure to liquidate would also expose the Company to legal action from the Department of Social Protection.

Jim Stafford

 

[Brendan Burgess]

I agree with Jim.

Your relative should do it properly, so that he has nothing to worry about in the future.

Brendan

 

[torblednam]

To clarify, as long as he acted "honestly and responsibly" up to the date of liquidation he should not have any issues. However, if he wishes to breach the Companies Acts by failing to file Annual Returns, not placing the company into liquidation etc, then he is exposing himself to possible legal action by CRO and ODCE. His failure to liquidate would also expose the Company to legal action from the Department of Social Protection.

Jim Stafford

Ok, I missed that nuance. Thanks Jim.