How Assets Are Disposed Of When A Business Closes

Businesses can close for all kinds of reasons including a change in the market conditions, substantial financial losses, or simply that the owner is retiring and no longer wishes to continue with their business. Whether it is any of these reasons, or some other reason, closing a business has several legal implications which is why the advice of a commercial lawyer should always be sought when closing a business.

The legalities that must be sorted of as part of the closing process will include settling all the liabilities that the business has, and the disposal of any assets the company owns. The process of disposing of the assets has several steps which include making reference to a hierarchy of the people and entities which are liable to receive payments from any funds raised from the sale of the assets.

The first stage of selling assets is to create an inventory or a list of all the assets that the company owns. These assets can be physical assets such as stock, machinery, or equipment, and they can also be intangible assets such as trademarks, copyrights, intellectual rights, and patents. Once all the assets are listed, and a value placed against them, they can then be sold.

The circumstances in which a business is closing may determine who carries out the process of selling assets. If a business owner is simply closing down their business then they could either do this themselves or hire specialists in the sale of business assets. On the other hand, if the business is closing due to liquidation then if that business has shareholders it may appoint a liquidator.

Whichever process is used, after a list of the company’s assets has been made, they can then be placed on the market for sale. Buyers can include any third party, another business, or even one of that business’s competitors. In fact, there are no rules that govern who can and cannot buy the assets of a company, unless there was some kind of legal restriction on them personally that prevented them from doing so.

Once the sale of the business’s assets is completed then it is beholding upon the liquidator or the company owners to pay any outstanding liabilities that are owed to creditors, but it has to be done in a particular order depending on the type of creditor they are.

The first group is secured creditors, and these are the creditors who lent the business money but had those loans secured assets that were owned by the company. These tend to be banks and financial companies and the assets in question will have been machinery, property, or company vehicles.

Next, we have what is known as preferential creditors and these will likely include employees who are owed wages, or outstanding bonuses and holiday pay. The reason they are classed as preferential creditors is that they have provided the business with their labour, time, and skills.

Third, are creditors who hold a floating charge, which are those creditors who are in neither of the top two groups. Floating charge creditors are those that the company may owe money to where the liability was secured against the goods and stock that the company owned.

The final group is unsecured creditors which should really be classified as ‘everyone else’. This will be landlords who are owed rent, lenders whose loans were not secured against assets, tax liabilities and suppliers who are owed money.