Liquidation with bounce back loan

[roger_roger]

Hello despite trying to diversify, my company has made a large loss due to the pandemic and unfortunately we are going to have to call it a day. We have about £10k left in the bank and we took out a £50k bounce back loan. My wife has been working for the company (in addition to her day job) and is owed around £5k in wages. My question is can I pay her before doing a CVL or would that not be permitted? I have also been working but am assuming I can't take any salary (and have not to date).

 

[Chris Parkman]

To Roger

Once a company in placed into liquidation you and your wife would be able to claim under the statutory regime with the Redundancy Payments Service. Employees can claim redundancy pay, arrears or wages, holiday pay and notice pay.

I would be happy to talk you through the process over the phone if that would be easier, or you can read about what employees can claim here . Alternatively you could contact an IP local to you, or one of the other IP's on this forum.

I would not recommend paying your wife before doing a CVL as only £800 of her wage arrears would be preferential, the balance would be unsecured.

 

[UK Contractor Accountant]

Have you looked at carrying the loss back to previous years to generate a tax refund - i think you can go back 3 years under the extended Relief rules due to Covid.

 

[roger_roger]

Hi thanks yes we have already claimed a cooperation tax refund

 

[roger_roger]

Redundancy

Hi she is not an employee she is a sole trader and I don't think I am an employee either in terms of any formal arrangement, would that mean I'm not entitled to redundancy?

 

[Chris Parkman]

To Roger

If she is not an employee then she will not be able to claim from the Redundancy Payments Service. With regards to you, are you paid through the payroll? Do you get a monthly payslip?

 

[Newchodge]

Hi she is not an employee she is a sole trader and I don't think I am an employee either in terms of any formal arrangement, would that mean I'm not entitled to redundancy?

How can your wife be owed 5K in wages if she is not an employee?

 

[roger_roger]

To Roger

If she is not an employee then she will not be able to claim from the Redundancy Payments Service. With regards to you, are you paid through the payroll? Do you get a monthly payslip?

No I have never taken a salary. All the money has been invested back into the company and I have a day job. Would it be too late to start paying myself through a payroll? And/or my wife? Then do the CVL?

 

[roger_roger]

How can your wife be owed 5K in wages if she is not an employee?

Apologies maybe wages is the wrong word. A conservative estimate of the amount of work she has done

 

[Newchodge]

Apologies maybe wages is the wrong word. A conservative estimate of the amount of work she has done

Has she invoiced the company?

 

[Chris Parkman]

It would be too late in my view to classify you and her as an employee. She will just be an unsecured creditor and rank equally with the other unsecured creditors

 

[roger_roger]

Has she invoiced the company?

No. But obviously she could do. I just need an understanding of what an insolvency practitioner will say before I were to pay her, rather than do it then get in trouble. I am accepting of the fact I will get nothing for all my work

 

[Newchodge]

No. But obviously she could do. I just need an understanding of what an insolvency practitioner will say before I were to pay her, rather than do it then get in trouble. I am accepting of the fact I will get nothing for all my work

If she hasn't issued an invoice she is owed nothing. If she issues an invoice she is one of the unsecured creditors who must all be treated the same. Pay her 100%, pay them all (including the loan) 100%. Pay her 5%, pay them all 5%.

 

[roger_roger]

If she hasn't issued an invoice she is owed nothing. If she issues an invoice she is one of the unsecured creditors who must all be treated the same. Pay her 100%, pay them all (including the loan) 100%. Pay her 5%, pay them all 5%.

thank you. would that be eg 5% of what they are owed or 5% of what is left in the company?

 

[Gavin Bates]

Hi

Having looked through the message it appears that Chris has answered all of your questions and I agree with his comments.

Regards

Gavin

 

[Newchodge]

thank you. would that be eg 5% of what they are owed or 5% of what is left in the company?

It's just an example. Basically if you pay anyone you pay everyone in proportion to what they are owed.

 

[Lisa Thomas]

No. But obviously she could do. I just need an understanding of what an insolvency practitioner will say before I were to pay her, rather than do it then get in trouble. I am accepting of the fact I will get nothing for all my work

An Insolvency Practitioner can pursue you both for an illegal preference and look to you both for repayment. They can also report the misconduct to the Insolvency services who can disqualify, or fine you.

Also, if you use the money to pay yourselves, you may not have enough to pay for liquidation...

More info can be found here on misconduct, including illegal preferences:

- YouTube

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youtu.be

 

[Lisa Thomas]

The video does not include the additional investigation we now have to do relating to covid funding. More on that here

- YouTube

Enjoy the videos and music that you love, upload original content and share it all with friends, family and the world on YouTube.

youtu.be

 

[roger_roger]

An Insolvency Practitioner can pursue you both for an illegal preference and look to you both for repayment. They can also report the misconduct to the Insolvency services who can disqualify, or fine you.

Also, if you use the money to pay yourselves, you may not have enough to pay for liquidation...

More info can be found here on misconduct, including illegal preferences:

- YouTube

Enjoy the videos and music that you love, upload original content and share it all with friends, family and the world on YouTube.

youtu.be

I have 3 other contractors who invoice and are paid on a weekly/monthly basis. Would they also be classed as an "illegal preference"? Or is it just because she is my wife? Thats why I haven't paid her as I thought there would be issues. How many months before you enter CVL do they look back to classify transactions as "illegal preferences"?

 

[Lisa Thomas]

Yes potentially, although unconnected parties are harder to pursue so it's almost always easier to pursue the director/s.

We go back 6 months if it's unconnected and up to 2 years if it's a connected party.

Also, if there is a technical issue we can't pursue under S239, we can sometimes pursue under S212 (misfeasance) which has not time limit.

 

[Lisa Thomas]

Insolvency Act 1986

An Act to consolidate the enactments relating to company insolvency and winding up (including the winding up of companies that are not insolvent, and of unregistered...

www.legislation.gov.uk

Insolvency Act 1986

An Act to consolidate the enactments relating to company insolvency and winding up (including the winding up of companies that are not insolvent, and of unregistered...

www.legislation.gov.uk

 

[Elliot Green]

Hello despite trying to diversify, my company has made a large loss due to the pandemic and unfortunately we are going to have to call it a day. We have about £10k left in the bank and we took out a £50k bounce back loan. My wife has been working for the company (in addition to her day job) and is owed around £5k in wages. My question is can I pay her before doing a CVL or would that not be permitted? I have also been working but am assuming I can't take any salary (and have not to date).

Your wife on my reading appears to be an Associate of the company (through you in the combination of Section 435(2) and 435(7)) of the Insolvency Act 1986 and therefore if she was paid £5k, it seems likely it could amount to a Preference and repayable on a CVL, with the likelihood that her defence to such an action an uphill struggle. Even if I am wrong about the Associate point it still appears an uphill struggle because if she is not owed arrears of wages because of no payroll, then if she were paid the £5k it *could* even be deemed a Transaction At An Undervalue under Section 238 of the Insolvency Act 1986 if she could not properly demonstrate the work she had done.

 

[roger_roger]

Your wife on my reading appears to be an Associate of the company (through you in the combination of Section 435(2) and 435(7)) of the Insolvency Act 1986 and therefore if she was paid £5k, it seems likely it could amount to a Preference and repayable on a CVL, with the likelihood that her defence to such an action an uphill struggle. Even if I am wrong about the Associate point it still appears an uphill struggle because if she is not owed arrears of wages because of no payroll, then if she were paid the £5k it *could* even be deemed a Transaction At An Undervalue under Section 238 of the Insolvency Act 1986 if she could not properly demonstrate the work she had done.

If I don't pay her and leave it to the IP to make the decision will that be fine?

 

[Elliot Green]

If I don't pay her and leave it to the IP to make the decision will that be fine?

If there is £10k left in the bank, then assuming that money is going to be the source of funds to pay the costs of putting the company into Liquidation and the Liquidator's fees as well i.e. the post-appointment period, then whilst I am certainly not clairvoyant, it would seem to me largely improbable your wife will see any of that money upon the company going into Liquidation and her submitting a claim in the Liquidation. The reason being is that it is probable the combination of the pre-appointment and the post-appointment fees will cause the £10k to be hoovered up by the reasonable fees of the Insolvency Practitioner ("IP") and the other expenses of the Liquidation which rank ahead of the unsecured creditors in the statutory order of payment in insolvency proceedings. The regulatory, investigatory and compliance requirements are extensive and time consuming. It is therefore quite likely that the IPs fees will stretch to and could even comfortably exceed the available £10k.

 

[Chris Ashdown]

Was the bounce back loan spent properly?

 

[Frank Wessely]

If I don't pay her and leave it to the IP to make the decision will that be fine?

Hi Roger, this thread has raised several useful points for you to consider. I suggest your next step should be to call 1 or 2 of us IPs and discuss the options so you can make an informed decision. My details are below if you decide to call. Regards.

 

[Lisa Thomas]

If I don't pay her and leave it to the IP to make the decision will that be fine?

Yes because you won't be committing an offense with the money. If you liquidate the company (either voluntarily or via court) the Liquidator will ensure the costs are paid out in priority as laid out by law. In short, that means the Liquidator gets paid first, followed by the preferential creditors.

 

[Elliot Green]

If I don't pay her and leave it to the IP to make the decision will that be fine?

It is likely to be a good idea to leave it to the IP to deal with based on the information that has currently been fleshed out here so far. The reason is assuming the company is insolvent then deployment of the asset (the leftover cash) needs to be done carefully. So if you leave it to the IP and the IP deploys the money incorrectly (hopefully not as that is what we know how to do) then it is unlikely to be a matter that would be an issue for you. On the other hand, if you decided to deal with it directly, you *might* make a payment from the available funds that was not strictly in accordance with your Director's duties and could, later on, be unwound. It might also be a matter that the Liquidator had to refer in his or her report/questionnaire that is always completed on the conduct of Directors to the Insolvency Service's Director Conduct Reporting Service. You might therefore find it fruitful to have a chat with one of us IPs to explore matters further. All the best.

 

[Lisa Thomas]

Yes because you won't be committing an offense with the money. If you liquidate the company (either voluntarily or via court) the Liquidator will ensure the costs are paid out in priority as laid out by law. In short, that means the Liquidator gets paid first, followed by the preferential creditors.

*Offence (!)