Question from a luddite: how does liquidation work?

Deleted member 62815 · Dec 10, 2009

Hello,

I wonder if some of you could help me - I've also asked my accountant, but thought this would be a good place to get a second opinion.

I am the sole director of a LTD with a modest turnover/profit. In January, I am being 'bought out' of this by a bigger company, so I'll become an employee of theirs and in return I'll receive a modest payment. I'll also be required to liquidate my existing business.

Now, I know nothing about how liquidation works, so wondered if someone could talk me through it please?

Firstly, I was told my the acquiring company's accountant that the best way for me to receive my payment would be a £15k payment to my LTD, which I could then distribute to myself as a dividend. Is this correct?

Secondly, how would the liquidation then work? The business was only incorporate in June, so has only traded for 6 months.

Let's say I have £20k in the bank at the end of 2009 (which I will have) and the company is then wound up:

How much corporation tax would I pay on this?
When would the corporation tax be due? 9 months after the accounting ref date? Or 9 months after liquidation? Or immediately upon liquidation?
Is a dividend the best way of receiving that money? Would I be liable for CGT?

If anyone could explain to me how liquidation works in simple terms I would be very greatful - the business is very small and I'm just trying to plan how much money I will be left with after all the liquidation has gone through - excluding accountant's fees.

Thanks!

elaine@cheapaccounting · Dec 10, 2009

This is really something for an accountant / tax advisor.

It depends on what the sale agreement says as to how the accounts, bank balance, assets etc are transferred.

Not enough info to give any meaningful advice really and something that needs careful planning based upon your circs and the sale agreement.

Deleted member 62815 · Dec 10, 2009

Hi Elaine,

Thanks for your response.

They are not transferring the assets or anything. All that's happening is that on January 1st I will be on the payroll of the new company and I will be asked to liquidate the old one. They remain distinct. Nothing is passing between the companies, other than a payment from them to my company.

To 'thank' me for joining the new company, £15k will be put into the LTD's account and I need to tidy everything up (accounts, then pay the remainder to me!).

So, just to reiterate: no transfers. Just £15k payments from Company A to Company B. Then Company B gets liquidated.

Thanks.

David Griffiths · Dec 10, 2009

thirdtimelucky said:
Firstly, I was told my the acquiring company's accountant that the best way for me to receive my payment would be a £15k payment to my LTD, which I could then distribute to myself as a dividend. Is this correct?

As Elaine says, there isn't enough information, but the above statement strikes me as being unlikely to be correct.

These matters are far from simple and a proper answer can only be given with full facts. Your accountant should have the full facts and is much better placed to advise than anybody else.

Deleted member 62815 · Dec 10, 2009

ok - thank you!

elaine@cheapaccounting · Dec 10, 2009

So you need to close your company - depending on the value of the assets in the company will dictate the best way to achieve this tax wise.

If you are getting £15k then I would strongly recommend spending a bit of this on good tax planning advice. The advice should pay for itself.

Maslins · Dec 10, 2009

I agree with David, and he's the tax guru. You'll need to discuss this in more depth with someone...but my thoughts based on your post:

I struggle to see how them paying your Ltd is best for you. You'll more than likely pay 21% CT on the £15k, and depending upon your personal earnings may suffer further tax personally upon withdrawing the funds.

If (for example) instead they bought the shares in the company from you for £15k you'd have a capital gain which (unless you have made other capital disposals in the year) would likely lead to a fairly negligible tax bill for you as the first ~£10k each year is exempt, and you'd only pay 10-18% on whatever's left.

...but then the £15k would not be tax deductible for them, whereas I imagine they'll argue it is if they pay the £15k to your Ltd Co.

Bear in mind their accountant will be working for them, not you...so take their recommendations as to what's best for you with a pinch of salt!

Spongebob · Dec 10, 2009

'Liquidation' is only appropriate for a company which is insolvent. It is clear that your company is not insolvent; therefore you canot really 'liquidate' it.

You should instead just cease trading, pay off any creditors, and apply to Companies House to have the company struck off. I am sure this would satisfy your new employers.

I am at a loss to understand why they are suggesting that the £15k is paid to your company. They are not buying your company or any of its assets. They are buying you, and so knocking out a competitor. I would ask them to make the cheque out to yourself personally. I am not a tax expert but I doubt that this would take you over any Capital Gains Tax threshold.

David Griffiths · Dec 10, 2009

Spongebob said:
'Liquidation' is only appropriate for a company which is insolvent. It is clear that your company is not insolvent; therefore you canot really 'liquidate' it.

In fact liquidation is appropriate for solvent and insolvent companies. There are three kinds - compulsory liquidation by the courts which is obviously for insolvency cases, creditors' voluntary liquidation, again for insolvent or marginal cases (any marginal cases quickly become insolvent when typical liquidators' charges are applied!) and a members' voluntary liquidation. In a MVL the directors sign a declaration of solvency, to the effect that all creditors will be paid within 12 months. There's no need (I think) to call a meeting of creditors, and the liquidator, who oddly must be a licensed insolvency practioner :| just collects the assets, pays the debts and distributes cash to the shareholders. It's normal to agree a fixed fee for this!

MVL is fairly rare because most companies go down the striking off route. However that relies on the Revenue's consent and if the paid up share capital is more than about £4,000 there's a risk that the Treasury might claim that it's theirs because the striking off procedure only allows distribution of profits, not the shares. I understand that they've become a bit more active in this field recently.

Edit to point out that the Revenue's agreement is actually an "Extra Statutory Concession" and I've read somewhere that all such concessions may be withdrawn so that things have to be done by the letter of the law. The argument goes along the lines that it should be the job of the Revenue to apply the law as it stands and not let off some people on what might be seen as a whim.

Spongebob said:
You should instead just cease trading, pay off any creditors, and apply to Companies House to have the company struck off. I am sure this would satisfy your new employers.

Having pointed out your misconception, I'm happy to agree that striking off is normally the best way!

Spongebob said:
I am at a loss to understand why they are suggesting that the £15k is paid to your company. They are not buying your company or any of its assets. They are buying you, and so knocking out a competitor. I would ask them to make the cheque out to yourself personally. I am not a tax expert but I doubt that this would take you over any Capital Gains Tax threshold.

Agreed again, which is why I made the comment above, but obviously without full facts it's risky to be prescriptive. One of those facts, btw, is what the buyer is prepared to do. The capital gains threshold is £10,100 this year but if there is more than one shareholder or if entrepreneurs' relief is available that might not be an issue, but don't forget that there seems to be cash in the company as well. There's also the factor that the OP is going to become an employee of the purchaser and you wouldn't want the £15k brought into the charge to PAYE.

pmb2009 · Dec 10, 2009

You really need to speak to an insolvency practitioner for advice.

Let me know and I can arrange this.

Kind regards,

Paul.

David Griffiths · Dec 10, 2009

pmb2009 said:
You really need to speak to an insolvency practitioner for advice.

Let me know and I can arrange this.

Kind regards,

Paul.

Rubbish (and that's not a term that I use lightly). You obviously haven't read the thread propery.

pmb2009 · Dec 10, 2009

David Griffiths said:
Rubbish (and that's not a term that I use lightly). You obviously haven't read the thread propery.

What do you mean rubbish? If you are planning to carry out any form of liquidation, including an MVL, then I would always suggest employing the services of an insolvency practitioner.

Spongebob · Dec 11, 2009

David Griffiths said:
In a MVL the directors sign a declaration of solvency, to the effect that all creditors will be paid within 12 months. There's no need (I think) to call a meeting of creditors, and the liquidator, who oddly must be a licensed insolvency practioner :| just collects the assets, pays the debts and distributes cash to the shareholders. It's normal to agree a fixed fee for this!

Thanks for pointing that out out David. Given that an IP doesn't normally even get out of bed for less than four grand it seems a very expensive and pointless way of closing down a solvent company.

No wonder I'd never heard of it!

David Griffiths · Dec 11, 2009

pmb2009 said:
What do you mean rubbish? If you are planning to carry out any form of liquidation, including an MVL, then I would always suggest employing the services of an insolvency practitioner.

I mean that in this case the OP is winding up a small company where the striking off procedure at Companies House is quite adeqate and there is absolutely no need to instigate formal winding up proceedings or incur the substantial cost of engaging an insolvency practitioner

Your assertion that "you really need" to speak to an IP is completely wrong

Perhaps you would always recommend using one (in fact if it's a liquidation then it's compulsory under law) but I suspect that you have a vested interest in so doing

pmb2009 · Dec 11, 2009

David Griffiths said:
I mean that in this case the OP is winding up a small company where the striking off procedure at Companies House is quite adeqate and there is absolutely no need to instigate formal winding up proceedings or incur the substantial cost of engaging an insolvency practitioner

Your assertion that "you really need" to speak to an IP is completely wrong

Perhaps you would always recommend using one (in fact if it's a liquidation then it's compulsory under law) but I suspect that you have a vested interest in so doing

How is it completely wrong? Speaking to an insolvency practitioner is usually free for the initial advice and without obligation to go ahead. In fact, it's pretty similar to speaking to an accountant. It can help in deciding the best route to take. The important thing is to discuss all details which cannot necessarily be discussed or resolved in a forum like this.

If everything could be resolved on this forum then there would probably be no need for half the businesses in the country.

elliotgreen · Jan 10, 2010

I would endorse what David Griffiths has said to you on this matter.

More information is needed to determine exactly how best to deal with your situation. If you want to google my name or go to Oury Clark Chartered Accountant's website you can get my contact details from there should you wish to discuss the matter further.

Spongebob · Jan 10, 2010

elliotgreen said:
I would endorse what David Griffiths has said to you on this matter.

Welcome Elliot,

You seem to have spent the whole night making posts - couldn't you sleep?

I'm interested in your agreement with David Griffiths' assertion that a visit to an insolvency practitoner is not necessarily the best move for a company director wanting to wind up a company.

My personal experience of insolvency practitioners has been very unsatisfactory. The response to hearing one's tale of woe seems to be 'No problem; we'll sort everything out for you and liquidate the company. Our fees will be £4500 plus VAT please.'

When I was in the position of having three companies all facing insolvency I found it almost impossible to get meaningful advice on what to do other than the inevitable 'Go see an IP'. Unfortunately I didn't have a pot to pi55 in - a situation faced by the majority of small company owners in this situation.

Through my own research and a lot of good fortune I managed to cobble together a plan of my own, which involved ceasing trading and vacating my premises under the cover of darkness before informing all creditors that the company had ceased to trade, could not pay its debts, and had no funds to appoint a liquidator.

In all three cases, most creditors never even responded and eventually HMRC issued winding up orders. The Official Receiver then liquidated the companies for me free of charge.

I have recommended this plan to many other company owners and my inbox is full of messages indicating that it has worked well for them.

I would be grateful of your professional opinion of any pitfalls a director of an insolvent company might face by letting HMRC and the OR liquidate their company rather than pay an IP to do it.

Bob.

elliotgreen · Jan 10, 2010

My endorsement is largely in relation to most of his post on 10th December 2009 20:42, not what you have suggested.

I would not endorse some of your strategies for dealing with these matters for some of the reasons given in earlier posts. Making recommendations which have at least the appearance of placing director in breach of some of their statutory duties is not something I can endorse.

Compulsory liquidation is not more desirable than voluntary. It is never preferrable to be pushed into something. What is cheap can sometimes become expensive. Statistically there appears to be more directors who ended up being struck off where companies go into compulsory rather than voluntary liquidation.

HRMC seem to take a dimmer view of directors who just leave it to creditors to incur the costs of liquidation rather than those who are responsible for it in the first place who take advice and are responsible for their own actions. This may make directors personally more susceptible to investigation.

When you consider the fees of Insolvency Practitoners this should be considered within the context of the level of the debts that have accumulated and such fees usually are quite small in comparison.

Spongebob · Jan 10, 2010

elliotgreen said:
HRMC seem to take a dimmer view of directors who just leave it to creditors to incur the costs of liquidation rather than those who are responsible for it in the first place who take advice and are responsible for their own actions. This may make directors personally more susceptible to investigation.

But at what point do HMRC have any involvement in the actual liquidation process? It appears to me from my experience that they simply initiate said process by issuing winding up proceedings: all work thereafter is conducted by the Official Receiver, whose staff I have found to be very sympathetic to the genuine plight of a failed company director.

elliotgreen said:
When you consider the fees of Insolvency Practitoners this should be considered within the context of the level of the debts that have accumulated and such fees usually are quite small in comparison.

Fair enough. But what about the great mass of cases where the failed company has no assets and the owners literally have no money with which to pay a liquidator. In many such cases personal bankruptcy is also inevitable, normally because of personal guarantees given to banks, landlords etc.

In these circumstances knowledge of how the compulsory liquidation process works is invaluable.

elliotgreen · Jan 10, 2010

Any creditor including HRMC can become involved in the liquidation process. There is no particular point that they will do so.

It will depend on a variety of factors as to whether or not they simply wind up a company as opposed to play an active part in the liquidation itself and assist the official receiver.

Your posts suggest that in your experience of a number of liquidation situations you have seen HRMC only wind up the company. There are thousands of liquidations every year in respect of which many of them HRMC play an active role.

Spongebob · Jan 10, 2010

elliotgreen said:
Your posts suggest that in your experience of a number of liquidation situations you have seen HRMC(sic) only wind up the company. There are thousands of liquidations every year in respect of which many of them HRMC(sic) play an active role.

My guess and my assumption (maybe flawed!) is that HMRC would only be interested in taking an active role in a lquidation if there was a realistic chance of retrieving a significant sum of money and/or securing a conviction for criminal activity.

Cetainly in my experience of cases where the debt to HMRC was relatively small (under £10k) they showed no interest in getting involved. With the rise in company liquidations over the last couple of years and the consequent pressure on resources I can't imagine that the chances of them assuming an active role has risen when the potential return is negligable.

Do I smell a vested interest in dissuading people from a DIY approach to liquidation?

elliotgreen · Jan 10, 2010

I have seen cases where HRMC have wound up a company for a £10k debt and where after investigation it turned out the debt was higher and the directors were sued personally for various breaches of their duties.

Spongebob · Jan 10, 2010

But that is in cases where the directors have acted wrongly. That's not what I am talking about.

I am referring to the majority of instances where honest and very hardworking directors of small companies have presided over a business that has failed. This could have been for any of a hundred reasons before any suspicion of wrongful trading could be raised.

In my experience most small companies go bust simply because the owner/directors were not very good at running them. I would include my own failures in this category.

Incompetence fortunately, is not yet a crime!

yorkshirejames · Jan 11, 2010

thirdtimelucky said:
Hello,

I wonder if some of you could help me - I've also asked my accountant, but thought this would be a good place to get a second opinion.

I am the sole director of a LTD with a modest turnover/profit. In January, I am being 'bought out' of this by a bigger company, so I'll become an employee of theirs and in return I'll receive a modest payment. I'll also be required to liquidate my existing business.

Now, I know nothing about how liquidation works, so wondered if someone could talk me through it please?

Firstly, I was told my the acquiring company's accountant that the best way for me to receive my payment would be a £15k payment to my LTD, which I could then distribute to myself as a dividend. Is this correct?

Secondly, how would the liquidation then work? The business was only incorporate in June, so has only traded for 6 months.

Let's say I have £20k in the bank at the end of 2009 (which I will have) and the company is then wound up:

How much corporation tax would I pay on this?
When would the corporation tax be due? 9 months after the accounting ref date? Or 9 months after liquidation? Or immediately upon liquidation?
Is a dividend the best way of receiving that money? Would I be liable for CGT?

If anyone could explain to me how liquidation works in simple terms I would be very greatful - the business is very small and I'm just trying to plan how much money I will be left with after all the liquidation has gone through - excluding accountant's fees.

Thanks!

I'm guessing your issue is now resolved. However just in case it isn't, here are a couple of points for you to consider:

-As others have said, you don't need to 'liquidate' the company, you merely need to close it.
-Do you have any continuity of employment with this new employer? Whether they admit it or not, you appear to be the subject of a TUPE transfer. Worth bearing in mind, if things turn nasty.
-Agree there are (on the basis of the limited information) more tax efficient ways to structure this £15k payment (and the withdrawal of circa £20k from the limited company). I'm thinking s.404 of ITEPA....

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Question from a luddite: how does liquidation work?

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