Planning for succession should be in the thoughts of everyone in business from early on. After all, what is to happen to your business when you decide it is time to retire? In other words, what is your own exit strategy when either you have attained your goal or age has finally caught up with you and retirement prevails?
Having succession plans is a good start but what happens if the business owner passes away prematurely? If that person was a director of a company then there will either be other directors in office or you can appoint a director for the purpose of retaining a going concern. The bigger issue is if the person in question is a sole proprietor.
Strictly speaking when a sole proprietor passes away then the business has no legal standing and should cease trading forthwith. Such a drastic step will lead to employee redundancies, the loss of business and, most likely, a crystallisation of liabilities such as employee entitlements, damages claims from third parties and commitments resulting from leases or other financial obligations. This is clearly not in the interest of the stakeholders.
Another fundamental issue when death occurs is the principle of personal liability imposed on the executors of the estate. This is particularly relevant if it is concluded the estate is insolvent. So, the conundrum executors’ face includes:
- Is the estate solvent?
- Even if evidence shows the estate is solvent beforehand, does the business ceasing to trade transform the estate into an insolvent position as a result of the liabilities arising as a result of cessation?
- If we allow the business to cease trading then are we liable for these resulting liabilities as it could be argued our conduct has caused these liabilities to arise?
Significant workloads in probate courts add further pressure on the executors as urgent decisions are required but the level of court workloads mean painful delays. Add the obvious emotions of a family losing an important member, along with the difficulty of accepting the reality in the early stages post death makes a frustrating and potentially disastrous financial cocktail.
Over the past year PBC have been engaged to assist the representatives of deceased estates, which has included applying to court for permission to trade and authority to take all steps required, such as opening a bank account or taking out insurance. In one of those matters the estate is heavily insolvent and the court appointed PBC as trustees under the long-winded Administration of Insolvent Estates of Deceased Persons Order 1986 (“DPO”). In reality, this is a polite way of saying the deceased has been made bankrupt.
Where the sole proprietor dies it is generally the case the estate is solvent and trading the business avoids jeopardising this status. This is where the experience of an insolvency practitioner (“IP”) can assist. Dealing with suppliers and other business creditors can often be challenging. IPs are used to dealing with fractious and, occasionally heated environments and employing their recovery/turnaround skills can safeguard the business while the principal matters of probate are addressed.
If you run a business and would like to discuss exit strategies, or you are an executor dealing with a business concern, PBC Business Recovery & Insolvency offers a free one hour consultation to discuss your situation and the possible options available. Call Gary Pettit or Gavin Bates on 01604 212150 completely confidentially, email email@example.com or visit www.pbcbusinessrecovery.co.uk for further information.
This article was first published in the June 2015 edition of the Business Times: http://edition.pagesuite-professional.co.uk//launch.aspx?eid=a89f947f-7cdc-4acf-9d4d-a16aa1eccb38