Test a buyout proposal before treating director deadlock as solved
Evaluate a proposed director or shareholder buyout separately from the distressed company funding problem.
Corporate Recovery Partners
01 / 06
Changing the owners may not fix the company
When one director wants to close and another wants to continue, a buyout can sound like a simple answer. But money paid for shares may go to the departing owner rather than the company. Before treating an exit proposal as a rescue, obtain legal and accounting advice about the transaction and the business's ability to meet its obligations.
Imagine a small fabrication company whose directors disagree about continuing. The remaining director proposes paying the other for their shares and injecting working capital. Show those amounts separately. Identify the proposed source, timing and conditions of each. A single headline funding figure should not disguise that most of the money would leave the business ownership group rather than fund wages or suppliers.
ASIC encourages early qualified advice where insolvency is suspected. Negotiations between owners can take time, and the company's debts continue to matter during them. Give the adviser the current financial records and the proposed buyout structure. Do not assume that an unsigned transaction permits new commitments or resolves existing concerns about the company's financial position.
Ask the lawyer and accountant about director loans, guarantees, security, disputed accounts and other obligations affected by the proposal. Leaving the board or selling shares should not be described as automatically releasing every personal or company obligation. In the fabrication example, the proposed purchase price and the departing director's loan balance may be entirely different items requiring explicit treatment.
Ask what happens if finance is declined, conditions are not satisfied or the directors cannot agree the documents. Keep a realistic alternative under review with the adviser. Avoid spending money the company does not have on the assumption that a proposed investor will complete. Record which commitments depend on completion and who is responsible for confirming it.
Only update the operating plan to reflect funding and ownership changes when the relevant facts are confirmed and advice supports the change. Retain the final documents and financial entries. A properly assessed buyout may form part of a solution, but the company still needs a workable financial position after the directors' personal disagreement is settled.
