Shahkti
13th March 2008, 16:37
I have a situation that is causing me a headache and I'd really appreciate advice.
Background - startup company building new technology so >80% of outgoings are on salary and relatively small income at this stage. Company gets into debt but not in classic model of external trade creditors owed money for materials or services. Much of the debt is internal - deferred salaries and loans from company founders (who are also employees).
Finally, debt gets to point where company failing cash flow and balance sheet insolvency tests / getting risky for wrongful trading. Board opts to put it into creditors voluntary liquidation.
Bank (floating charge holder) gets paid first from assets / balance from founders' personal guarantees. Of the remainder, all are unsecured creditors. Money owed to founders makes up around 50% of total. Amount not important but let's say that is £250K. Founders now stone-broke (no salary and all spare money ploughed into company).
Last remaining asset is intellectual property rights (IPR). Liquidator has duty to obtain best possible value for asset, ensure best deal for creditors, etc. High probability that direct sale of IPR likely to raise no more than £20K. If back in hands of founders, IPR might be able to generate £100K over course of 12-15 months.
Now for the questions:
- If Liquidator was offered say £1K more than founders were able to afford in sale to other party, where would that leave the rights of the founders as major creditors? Could they block the sale?
- Founders loans are unsecured, but what stops them from insisting that, in return for the IPR, they'd be willing to write off the debt (which is 50% of the total).
- If the 50:50 nature of this is an issue, assume founders can get say another 10% and therefore a majority.
Advice for other people reading this - whenever you put money into your own company always make it a loan with interest and above all make sure that you put a debenture on the company and its assets in return. Just like the Bank does, in fact. Worse case, it may have to be negotiated out before a future investor buys shares in company. Best case, you get something back if/when it goes wrong.
Background - startup company building new technology so >80% of outgoings are on salary and relatively small income at this stage. Company gets into debt but not in classic model of external trade creditors owed money for materials or services. Much of the debt is internal - deferred salaries and loans from company founders (who are also employees).
Finally, debt gets to point where company failing cash flow and balance sheet insolvency tests / getting risky for wrongful trading. Board opts to put it into creditors voluntary liquidation.
Bank (floating charge holder) gets paid first from assets / balance from founders' personal guarantees. Of the remainder, all are unsecured creditors. Money owed to founders makes up around 50% of total. Amount not important but let's say that is £250K. Founders now stone-broke (no salary and all spare money ploughed into company).
Last remaining asset is intellectual property rights (IPR). Liquidator has duty to obtain best possible value for asset, ensure best deal for creditors, etc. High probability that direct sale of IPR likely to raise no more than £20K. If back in hands of founders, IPR might be able to generate £100K over course of 12-15 months.
Now for the questions:
- If Liquidator was offered say £1K more than founders were able to afford in sale to other party, where would that leave the rights of the founders as major creditors? Could they block the sale?
- Founders loans are unsecured, but what stops them from insisting that, in return for the IPR, they'd be willing to write off the debt (which is 50% of the total).
- If the 50:50 nature of this is an issue, assume founders can get say another 10% and therefore a majority.
Advice for other people reading this - whenever you put money into your own company always make it a loan with interest and above all make sure that you put a debenture on the company and its assets in return. Just like the Bank does, in fact. Worse case, it may have to be negotiated out before a future investor buys shares in company. Best case, you get something back if/when it goes wrong.