Liquidation nightmare

[Paul Space]

Good evening.
I’ll try and keep this brief. We had to put our limited company (2 directors) into liquidation at the beginning of 2023. Accounts were done and submitted for beginning 2021 and done but not submitted for beginning of 2022. The most recent accounts (not submitted)had a OD DLA £4k for one director and -£500 for the other. We owed around £30k at the time of liquidation and 2 vans with the value of around £15k were handed over at the time.

Fast forward 18 months after hearing nothing from the liquidation company we received a letter from a law firm saying that we owe £65k for OD DLA this is for all the payments the directors received from 2021-2023 minus salary. At this point we can only communicate though the lawyer. We sent them the un submitted accounts that show a small DLA at the start of 2022 but they refused to accept them. Later they wanted self assessments from both directions and ledgers along with the accounts from the accountant but it was a struggle to get the accountant to do anything as he’s no longer working for us.

Finally we got the accountant to help us and put some supporting documents together to present to them. He sent them the accounts as of 2022 showing £4k OD DLA when these accounts were done there was no intention to liquidate. He put goodwill and tools in the accounts as we combined 2 sole trader businesses to create the Ltd company also there were £5k of dividends per director for the first 6 months of the final year when the company was in profit. All this brought the figure down to £16k total.

We received a letter today saying that the liquidator. Doesn’t accept the goodwill, doesn’t accept the allowance for tools, claims that the dividends were unlawful when they can’t say the company wasn’t profitable during them months. The amount they say we owe is £20k plus£19k so including the assets they’ve already had £54k the debt at the start was £30k

How can they disregard the accounts figures completely and seemingly but whatever possible to make the figure we owe as high as possible. There will be a lot of lawyers fees for them but that their fault for instructing a lawyer before any contract.

Any advice experience on anything like this would be greatly appreciated.

Thanks

 

[Elliot Green]

Good evening.
I’ll try and keep this brief. We had to put our limited company (2 directors) into liquidation at the beginning of 2023. Accounts were done and submitted for beginning 2021 and done but not submitted for beginning of 2022. The most recent accounts (not submitted)had a OD DLA £4k for one director and -£500 for the other. We owed around £30k at the time of liquidation and 2 vans with the value of around £15k were handed over at the time.

Fast forward 18 months after hearing nothing from the liquidation company we received a letter from a law firm saying that we owe £65k for OD DLA this is for all the payments the directors received from 2021-2023 minus salary. At this point we can only communicate though the lawyer. We sent them the un submitted accounts that show a small DLA at the start of 2022 but they refused to accept them. Later they wanted self assessments from both directions and ledgers along with the accounts from the accountant but it was a struggle to get the accountant to do anything as he’s no longer working for us.

Finally we got the accountant to help us and put some supporting documents together to present to them. He sent them the accounts as of 2022 showing £4k OD DLA when these accounts were done there was no intention to liquidate. He put goodwill and tools in the accounts as we combined 2 sole trader businesses to create the Ltd company also there were £5k of dividends per director for the first 6 months of the final year when the company was in profit. All this brought the figure down to £16k total.

We received a letter today saying that the liquidator. Doesn’t accept the goodwill, doesn’t accept the allowance for tools, claims that the dividends were unlawful when they can’t say the company wasn’t profitable during them months. The amount they say we owe is £20k plus£19k so including the assets they’ve already had £54k the debt at the start was £30k

How can they disregard the accounts figures completely and seemingly but whatever possible to make the figure we owe as high as possible. There will be a lot of lawyers fees for them but that their fault for instructing a lawyer before any contract.

Any advice experience on anything like this would be greatly appreciated.

Thanks

In general terms, it is the breakdown of what is behind a set of accounts that matters when the headline numbers fleshed out in them are challenged.

A liquidator is entitled to scrutinise the figures.

 

[Paul Space]

In general terms, it is the breakdown of what is behind a set of accounts that matters when the headline numbers fleshed out in them are challenged.

A liquidator is entitled to scrutinise the figures.

But are they able to disregard allowable expenses and allowances put in there buy a chartered accountant? This seems to me beyond their remit and the ONLY reason for doing what they are doing is to inflate the figure. What’s the point in paying a chartered accountant when they can just ignore the figures. I mean they are claiming £15k more than the total company debt at the start of the process. Where will this go in theirs and the lawyers pocket 100%

 

[Elliot Green]

But are they able to disregard allowable expenses and allowances put in there buy a chartered accountant? This seems to me beyond their remit and the ONLY reason for doing what they are doing is to inflate the figure. What’s the point in paying a chartered accountant when they can just ignore the figures. I mean they are claiming £15k more than the total company debt at the start of the process. Where will this go in theirs and the lawyers pocket 100%

Allowable expenses are allowable because they are inherently capable in their own right of being justified as an expense for the benefit of the company. Bare assertion (even of an expert) is not necessarily enough. Expenses someone says are allowable should be shown (ideally with reference to documents) to be bona fide. The burden is on a director - GHLM Trading Ltd v Maroo & Ors [2012] EWHC 61 (Ch)

"...once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director's loan account, it must be incumbent on the director to justify credit entries on the account." [added emphasis]

Anyone a director instructs (including but not limited to an expert) will usually act on their instruction. Someone else may not know the basis of the instructions provided. Perhaps notably an expert who acts as an expert witness in legal proceedings can anticipate having their work scrutinised (under cross-examination) and not relied upon as fact untested.

It is usually within a liquidator's remit to test the information provided. The case of Top Brands v Sharma [2014] EWHC 2753 (Ch), albeit an unusual case, considered a liquidator's conduct and said:

"... any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator's duties..." [added emphasis]

An overdrawn director's loan account is an asset of the company. There is a statutory order of payment in insolvency proceedings which determines how recoveries are to be deployed. The level of an ODLA is not determined by the level of creditors; it is determined by the amount a director owes to a company after an account of all relevant transactions is taken.

Disclaimer: This is not legal advice and is not to be relied upon as such or indeed at all. This post is provided for information purposes only. Consider taking independent professional advice on the facts of your case.

 

[Paul Space]

Allowable expenses are allowable because they are inherently capable in their own right of being justified as an expense for the benefit of the company. Bare assertion (even of an expert) is not necessarily enough. Expenses someone says are allowable should be shown (ideally with reference to documents) to be bona fide. The burden is on a director - GHLM Trading Ltd v Maroo & Ors [2012] EWHC 61 (Ch)

"...once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director's loan account, it must be incumbent on the director to justify credit entries on the account." [added emphasis]

Anyone a director instructs (including but not limited to an expert) will usually act on their instruction. Someone else may not know the basis of the instructions provided. Perhaps notably an expert who acts as an expert witness in legal proceedings can anticipate having their work scrutinised (under cross-examination) and not relied upon as fact untested.

It is usually within a liquidator's remit to test the information provided. The case of Top Brands v Sharma [2014] EWHC 2753 (Ch), albeit an unusual case, considered a liquidator's conduct and said:

"... any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator's hduties..." [added emphasis]

An overdrawn director's loan account is an asset of the company. There is a statutory order of payment in insolvency proceedings which determines how recoveries are to be deployed. The level of an ODLA is not determined by the level of creditors; it is determined by the amount a director owes to a company after an account of all relevant transactions is taken.

Disclaimer: This is not legal advice and is not to be relied upon as such or indeed at all. This post is provided for information purposes only. Consider taking independent professional advice on the facts of your case.

The reason the DLA is so high is partly due to the fact that the liquidation is not accepting the Goodwill and tools that was introduced to the business. This was done by the accountant and now the liquidator is overruling it. Is this in anyway normal. I’ve spoken with a few liquidators and accountants and they all said that the accountants should be accepted. I’m aware that the DLA and the creditors are not related

 

[Paul Space]

But ending up paying more back than the original debt doesn’t seem normal either. As a liquidator yourself what kind of % is likely to be accepted as a settlement. We don’t have anywhere near what they’re claiming but want this to end.

 

[UK Contractor Accountant]

This leads on to the question whether liquidators in conjunction with their prosecuting Solicitors are suitably qualified individuals to challenge company accounts prepared in accordance with GAAP and FRS Standards (FRS102 & FRS105) applicable to small companies.

Surely they should be engaging their own Qualified forensic Accountants to look into the accounts rather than just blankly stating we are not accepting those values put on assets transferred into the company.

I always advise clients to get independent valuers in for valuing assets that form part of the Incorporation of sole trader/partnership businesses.

 

[Paul Space]

This leads on to the question whether liquidators in conjunction with their prosecuting Solicitors are suitably qualified individuals to challenge company accounts prepared in accordance with GAAP and FRS Standards (FRS102 & FRS105) applicable to small companies.

Surely they should be engaging their own Qualified forensic Accountants to look into the accounts rather than just blankly stating we are not accepting those values put on assets transferred into the company.

I always advise clients to get independent valuers in for valuing assets that form part of the Incorporation of sole trader/partnership businesses.

Thanks for the reply. I’ve looked at the letter again and they are not disallowing the Goodwill and Tools from the accounts because they disagree with them. It seems that they weren’t included in the forms that we completed at the start of the process. This must have been an oversight by us but they never even spoke to our accountant at the time. By forgetting to tell them about it doesn’t mean mean they don’t exist. The Goodwill and Tools is £16k in total so it’s convenient for them to not include it.

 

[Elliot Green]

The reason the DLA is so high is partly due to the fact that the liquidation is not accepting the Goodwill and tools that was introduced to the business. This was done by the accountant and now the liquidator is overruling it. Is this in anyway normal. I’ve spoken with a few liquidators and accountants and they all said that the accountants should be accepted. I’m aware that the DLA and the creditors are not related

Nothing irregular about a liquidator testing the assertions of someone seeking to apply credits to a director's loan account. If the tools and goodwill can be evidenced and do not need to rely upon estimates and bare assertions, then the potential to push on an open door might be arise.

 

[Elliot Green]

But ending up paying more back than the original debt doesn’t seem normal either. As a liquidator yourself what kind of % is likely to be accepted as a settlement. We don’t have anywhere near what they’re claiming but want this to end.

The duty of the liquidator is to realise the assets. If someone is unable to pay then it would usually be a relevant factor taken into account. A liquidator is entitled to take commercial decisions.

 

[Elliot Green]

This leads on to the question whether liquidators in conjunction with their prosecuting Solicitors are suitably qualified individuals to challenge company accounts prepared in accordance with GAAP and FRS Standards (FRS102 & FRS105) applicable to small companies.

Surely they should be engaging their own Qualified forensic Accountants to look into the accounts rather than just blankly stating we are not accepting those values put on assets transferred into the company.

I always advise clients to get independent valuers in for valuing assets that form part of the Incorporation of sole trader/partnership businesses.

The burden of proof is on the director; it is not on the liquidator. Building on that position, a liquidator that litigates such a matter is under no obligation without Court direction to deploy a forensic accountant. It is not unknown for a liquidator to test the director's evidence on challenged transactions using the Re Idessa (UK) Ltd [2001] EWHC 804 (Ch) rationale:

"I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate … [counsel for the liquidator] is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for [counsel for the liquidator] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes."

Furthermore, quite a number of liquidators are qualified accountants who have had experience in the preparation and perhaps the audit of UK GAAP structured accounts.

 

[UK Contractor Accountant]

Furthermore, quite a number of liquidators are qualified accountants who have had experience in the preparation and perhaps the audit of UK GAAP structured accounts.

Agreed - then they should be aware that it is common practice on incorporation of a business that assets are/can be bought into the company at market value at the date of transfer. If the Directors and advisors have used best effort to arrive at fair market value for those assets then a blanket refusal by a a liquidator to accept those values is a step to far.

To quote the case law above:

However, it seems to me to be a step too far for [counsel for the liquidator] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes."

 

[Paul Space]

But from the letter, they’re not disputing the assets (goodwill and tools) or the value claimed against them. They’re disallowing them because apparently they weren’t listed of the forms we sign upon instruction of the liquidation company. The accounts in question were done a year previously. So my question is even if they weren’t declared on the form which may be the case of an error on our part. I can’t see how they can pretend that they don’t exist.

 

[Paul Space]

But from the letter, they’re not disputing the assets (goodwill and tools) or the value claimed against them. They’re disallowing them because apparently they weren’t listed of the forms we sign upon instruction of the liquidation company. The accounts in question were done a year previously. So my question is even if they weren’t declared on the form which may be the case of an error on our part. I can’t see how they can pretend that they don’t exist.

The letter states that as these allowances weren’t on forms they were given at the beginning that they must have been added post liquidation which is an absolute lie and we have lots of evidence to prove that.

 

[Elliot Green]

Agreed - then they should be aware that it is common practice on incorporation of a business that assets are/can be bought into the company at market value at the date of transfer. If the Directors and advisors have used best effort to arrive at fair market value for those assets then a blanket refusal by a a liquidator to accept those values is a step to far.

To quote the case law above:

However, it seems to me to be a step too far for [counsel for the liquidator] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes."

If there is no independent and or contemporaneous valuation and if it is a book value-based journal entry, then depending on values, that might well not be good enough.

A liquidator does not have to simply accept the director's independent valuation either. A liquidator can seek to test the rationale of the director's valuation.

A Liquidator is within their rights to obtain their own valuation from a valuation agent acting on their instructions and who owes a duty of care to the liquidator. The director's valuer usually will owe a duty of care to the director, not the liquidator.

 

[UK Contractor Accountant]

The letter states that as these allowances weren’t on forms they were given at the beginning that

Surely the values were already included in your Director Loan accounts at the start of the company.

Have the liquidators not seen the movement on your DLA's which reconcile with the year end accounts balance at the end of the first financial year?

 

[Paul Space]

Surely the values were already included in your Director Loan accounts at the start of the company.

Have the liquidators not seen the movement on your DLA's which reconcile with the year end accounts balance at the end of the first financial year?

we instructed the liquidator and gave them everything we had that they asked for eg, bank statements, ID, details of the company, at the time they were mostly interested in the vehicles (2 vans) that were to be handed over. They say that we didn’t list the tools and goodwill on their forms but they never mentioned declaring tools at the time their approach was so casual like everything’s fine you’ve got nothing to worry about. Anyway our thought was that they would contact the accountant straight away to retrieve all of the outstanding documents that we couldn’t provide. They didn’t. He received a letter from the lawyer 18 months later. The accounts that we sent them were done in May 2022 and the liquidation started in February 2023. They have no evidence that these allowances were done post liquidation and we have a lot of evidence showing that they were on the accounts 8 months before the liquidation. How is this legal??????

 

[Lisa Thomas]

What happened between May 2022 and February 2023 as regards any drawings?

 

[fisicx]

How is goodwill calculated? Is it something that can be recovered when a business liquidates?

How are tools valued? Their resale value may be a fraction of their worth.

 

[Elliot Green]

we instructed the liquidator and gave them everything we had that they asked for eg, bank statements, ID, details of the company, at the time they were mostly interested in the vehicles (2 vans) that were to be handed over. They say that we didn’t list the tools and goodwill on their forms but they never mentioned declaring tools at the time their approach was so casual like everything’s fine you’ve got nothing to worry about. Anyway our thought was that they would contact the accountant straight away to retrieve all of the outstanding documents that we couldn’t provide. They didn’t. He received a letter from the lawyer 18 months later. The accounts that we sent them were done in May 2022 and the liquidation started in February 2023. They have no evidence that these allowances were done post liquidation and we have a lot of evidence showing that they were on the accounts 8 months before the liquidation. How is this legal??????

Depending on how many years you were trading as a limited company, those items in the normal scheme of things might have been incorporated in the brought forward position (what are sometimes called the opening balances) each year from the point of incorporation and when the DLA started running and being reflected in the accounts.

The fact these items are in a set of unfiled accounts (as I understand matters) just 8 months before liquidation still seems potentially to leave room for some query if this is the first time they have been introduced into the accounts.

If perhaps you are saying that some years down the track you are looking to adjust the overdrawn DLA balance in a set of accounts that have a year / period end date 8 months before liquidation for such items and they were not already incorporated in pre-existing figures, then I can perhaps understand a liquidator querying the position.

As a very general rule (which may have exceptions), you cannot rewrite history and this may fetter an attempt (if indeed any attempt is being made as to that), now seek credit for transactions that were not incorporated in the accounts at the start of the company's life by for example introducing a material goodwill figure, particularly if it is a number of years later.

 

[Lisa Thomas]

Your best bet is to instruct a specialist insolvency solicitor to negotiate repayment for you, based on your personal financial positions.

I can recommend one if needed. Feel free to dm me.

 

[Paul Space]

But the reason they aren’t excepting it isn’t because of any of the reasons that you have stated. It’s because they think these figures were added POST LIQUIDATION. which in theory means after we received the first letter from the lawyer. This is a very serious accusation without any evidence and 100% didn’t happen. Upon receiving the first letter we sent all documents we had within 2 weeks and the accountant didn’t get involved for 3 more months. My point is they have no evidence that this was added post liquidation and we have lots of evidence that it was done in May 22.

 

[Paul Space]

Your best bet is to instruct a specialist insolvency solicitor to negotiate repayment for you, based on your personal financial positions.

I can recommend one if needed. Feel free to dm me.

Thanks. I know that may be the case. We are going to offer something but our figure has to be based on the amount at the very least with the allowances added as their basis for not adding them is not true.

 

[Paul Space]

What happened between May 2022 and February 2023 as regards any drawings?

End of year was Feb 22 we received the accounts in May. We carried on taking an amount every week until October of that year. We declarded a dividend for the period until the company became unprofitable. They say this was unlawful and they have also disallowed that.

 

[UK Contractor Accountant]

Accounts were done and submitted for beginning 2021

were the assets transferred in not included is these first period accounts?

 

[Paul Space]

were the assets transferred in not included is these first period accounts?

Not 100% probably not.

 

[fisicx]

How were you recording Goodwill and Tools in the pre-2022 accounts?

 

[Elliot Green]

End of year was Feb 22 we received the accounts in May. We carried on taking an amount every week until October of that year. We declarded a dividend for the period until the company became unprofitable. They say this was unlawful and they have also disallowed that.

 

[Paul Space]

How were you recording Goodwill and Tools in the pre-2022 accounts?

Couldn’t say.

 

[fisicx]

Couldn’t say.

Which is probably why they aren’t being considered by the liquidator.

 

[Newchodge]

We declarded a dividend for the period until the company became unprofitable. They say this was unlawful and they have also disallowed that.

My understanding is that dividends are based on annual profits, In year dividends are interim until the year end, when they can be confirmed or withdrawn, so the liquidator is potentially right here.

 

[Paul Space]

Which is probably why they aren’t being considered by the liquidator.

They’re not being considered by the liquidator because they are claiming that they were added to the accounts post liquidation. Which is false.

 

[fisicx]

Are they in the accounts going back to the day you brought the tools? Are you depreciating the value?

How is goodwill part of the accounts?

Right now the liquidator doesn’t believe you. Where is your proof?

 

[Paul Space]

Are they in the accounts going back to the day you brought the tools? Are you depreciating the value?

How is goodwill part of the accounts?

Right now the liquidator doesn’t believe you. Where is your proof?

The business was 2 separate sole trader businesses joking into a Ltd company. Bringing tools and clients into it. My argument is that the accounts with the goodwill and tools in them were produced 9 months before liquidation. They are saying that we must have altered the accounts after liquidation. This is not the case at all and they have no evidence because it didn’t happen.

 

[UK Contractor Accountant]

My argument is that the accounts with the goodwill and tools in them were produced 9 months before liquidation

the question is why they were not included in the first period accounts - did you not have van costs in the first period accounts, were you not using the tools/plant in the first period?

The Liquidator has got a sniff that the assets were only bought in the second period to validate drawings from the company.

They asked to see your self assessment returns to see if the proper balancing charges & capital gains were included for the disposal of the assets to the Ltd company.

 

[Paul Space]

the question is why they were not included in the first period accounts - did you not have van costs in the first period accounts, were you not using the tools/plant in the first period?

The Liquidator has got a sniff that the assets were only bought in the second period to validate drawings from the company.

They asked to see your self assessment returns to see if the proper balancing charges & capital gains were included for the disposal of the assets to the Ltd company.

Why not use this as an argument to not allow it then? Instead of saying that the reason was because it was done post liquidation. That’s a fair question of why they weren’t introduced earlier. I’m not an accountant so I don’t know the answer but is there anything wrong with it being done later?

 

[Elliot Green]

Why not use this as an argument to not allow it then? Instead of saying that the reason was because it was done post liquidation. That’s a fair question of why they weren’t introduced earlier. I’m not an accountant so I don’t know the answer but is there anything wrong with it being done later?

There can potentially be a problem of introducing transactions later if by doing so the transactions are developed at the later date and then backdated into an earlier date.

Recording after the event what has happened as a matter of fact is one thing but introducing after the event something that didn't happen and reworking figures to introduce that which has been created after the event as if it happened at an earlier date, that's something else.

 

[Paul Space]

There can potentially be a problem of introducing transactions later if by doing so the transactions are developed at the later date and then backdated into an earlier date.

Recording after the event what has happened as a matter of fact is one thing but introducing after the event something that didn't happen and reworking figures to introduce that which has been created after the event as if it happened at an earlier date, that's something else.

Nothing has been introduced or re worked. The accounts have not altered from the time of receiving them. Like I said earlier within 2 weeks of receiving the letter from the lawyer they were sent the accounts as we received them 18 months prior and the CT600 form which also backs up the inputs according to the accountant.

 

[pentel]

When was the company formed? Were the assets introduced when the company was first formed and have they been on the accounts from the first set of accounts?

 

[UK Contractor Accountant]

When was the company formed? Were the assets introduced when the company was first formed and have they been on the accounts from the first set of accounts?

We've been all through that - no they weren't. Think in the second accouting period

I suspect that the Accountants haven't properly accounted for the cessation of the sole trader businesses- capital gain on the tax returns for goodwill sale and balancing charges for capital allowance for van & tools.