Best way to wind up ltd company

[pete_panther]

Hi,

My ltd company currently owes (approx.):
£25,000 to the bank with a debenture and personal guarantee,
£100,000 to creditors
And £4,000 to HMRC

We have no assets, but have about £30,000 in the bank. We’ve avoided paying anyone anything, informing them that we’re having cash-flow issues and that we can’t pay them as we’d be breaking the law if we did, but that we’re currently looking for further investment.

The further investment has fallen through so it now looks like we’re going to have to wind up the company.

Ideally, we’d like to be able to pay the bank (who as I understand it are a preferred creditor due to the debenture), put enough money aside to pay for filing for bankruptcy, then split the rest proportionally between the creditors (so each would get about 4p to every £1 owed – not great but better than nothing).

One of my colleagues has seen an IP who's said that their fees are £8k, so that'd leave us with about £22k in the bank to cover the £25k loan meaning£3k would have to come out of our personal money.

A couple of our creditors have threatened to take us to court so I’ve got a feeling they’ll object if we were to just try and winding up the company by applying to Companies House.

Would anyone be able to give me some advice on how to approach this?

A couple of final questions:
I understand employees’ salaries gets treated as a preferred payment. Does this apply to director’s salaries as well, as they’re an employee?

Also, the above company is a part-time venture for me as I also work for a financial institution for my ‘day job’. I've heard that if I was to go bankrupt personally I could lose my job (or at least not be able to get another job with a financial institution). Would you know if this is also the case if I’m a director of a company that goes bankrupt?

Thanks in advance.

 

[Scalloway]

I am not sure what you mean by money in the bank? is this your own money, not the company's?

 

[Spongebob]

Assuming that the money in the bank is in an account under the company's name, and that this is the same bank with whom the company has the secured and guaranteed loan, then a simple meeting with your bank manager should resolve the issue with your backside covered.

Be full and frank about the dire state of the company's finances, and plead with him for further support. He will almost certainly refuse and seize 25k from the current account to pay off the loan.

Job done.

If however, you acted to settle the loan using the company's funds, that would be preference.

 

[Shreena shreen]

As you said "if you are bankrupt,you will loose your job" preferably you pay the bank first and for the other creditors try to negotiate with them and ask for more time to pay them!!

If there is still a lack of money,better you take from your personal account and if possible take from family members or friends as i saw "creditors have threatened to take you to court",its reasonable to pay them quickly before ending up with the court.

 

[Scalloway]

As you said "if you are bankrupt,you will loose your job" preferably you pay the bank first and for the other creditors try to negotiate with them and ask for more time to pay them!!

If there is still a lack of money,better you take from your personal account and if possible take from family members or friends as i saw "creditors have threatened to take you to court",its reasonable to pay them quickly before ending up with the court.

The creditors are the company's creditors so the OP is under no obligation to pay them himself. The only obligation he has is to the bank.

 

[Spongebob]

Assuming that the money in the bank is in an account under the company's name, and that this is the same bank with whom the company has the secured and guaranteed loan, then a simple meeting with your bank manager should resolve the issue with your backside covered.

Be full and frank about the dire state of the company's finances, and plead with him for further support. He will almost certainly refuse and seize 25k from the current account to pay off the loan.

Job done.

If however, you acted to settle the loan using the company's funds, that would be preference.

Further to my post of early this morning, I am convinced that the best course of action is via an informal chat with the bank, putting nothing in writing. Make it quite clear that the company is on the brink of insolvency, and that you have insufficient personal assets to honour the guarantee. Spin the sob story about potential personal bankruptcy and the loss of your livelihood. Even suggest that the bank might like to take the money owed out of the company current account as I am sure it will be entitled to do in the terms and conditions of the loan agreement. Do not however, sign anything or action any transfer of the money yourself.

I then see the saga unfolding thus;


With the bank loan settled and you off the hook for the guarantee cease all trading activities and write to all creditors using the standard Spongebob letter;



Then sit back and wait for the backlash. You will be surprised how modest it will be!

Most creditors will take the view "Bugger - there goes another one!" and simply write the debt off.

Some will get stroppy and pester you with calls. Changing your mobile number at this juncture is probably a very good idea.

One or two might even take court action, which will be a total waste of their time and money. Even if they get judgement (which they will) it will be unenforceable as the company has no assets.

Eventually, it is likely that HMRC will wind the company up and the Official Receiver will be appointed liquidator.

They will find a company with no assets, over £100k worth of debt, and perhaps five grand in the bank account which will have been frozen once the winding up order was made.

It is possible that they will look closely enough at the records to see that some months previously the bank loan of £25k was settled in full. This is where you explain that you went cap in hand to the bank to ask for further help to get you over a sticky time and the bank instead foreclosed on the loan, seizing the outstanding balance from the company's funds. It was this that precipitated the recognition of insolvency and the ceasing of trading.

This is so far from being an untypical story that it is almost certain that the OR will buy it. Even if they don't, they can't prove intent to prefer the bank or to improve your personal position vis a vis the guarantee.


This might not be playing a completely straight bat, but the odds are very much that you will get away with it. The worst case scenario is that you will be put back into exactly the situation that you are in now.

It's got to be worth a punt, in my view.

 

[Alan R Price]

Hi,

My ltd company currently owes (approx.):
£25,000 to the bank with a debenture and personal guarantee,
£100,000 to creditors
And £4,000 to HMRC

We have no assets, but have about £30,000 in the bank.

An asset is anything the company owns, including bank balances, debts owed to it and claims it is entitled to make, such as insurance claims.

We’ve avoided paying anyone anything, informing them that we’re having cash-flow issues and that we can’t pay them as we’d be breaking the law if we did, but that we’re currently looking for further investment.

The company can continue making payments as long as such payments are intended to improve the position of the creditors generally (as opposed to preferring one creditor over another). This could include paying essential suppliers, wages etc. to allow the company to continue to trade pending a sale of its business as a going concern or to complete existing contracts or work-in-progress that can be billed out to swell the coffers for the creditors. But take advice on this from an IP to avoid falling foul of the legislation.

The further investment has fallen through so it now looks like we’re going to have to wind up the company.

Ideally, we’d like to be able to pay the bank (who as I understand it are a preferred creditor due to the debenture), put enough money aside to pay for filing for bankruptcy, then split the rest proportionally between the creditors (so each would get about 4p to every £1 owed – not great but better than nothing).

Just to make sure you understand the terminology: companies do not "file for bankruptcy". Bankruptcy as a formal process applies only to individuals, as opposed to limited companies. Companies go into liquidation, administration, company voluntary arrangement or (very rarely nowadays) receivership.

Be very careful about trying a "DIY" liquidation such as you suggest. You may still fall foul of the law. The charge (debenture) to the bank will be split into two parts - fixed and floating - and floating charge assets are subject first of all to the claims of preferential creditors, then to the "prescribed part", before any payment can be made to the bank. If you were to get this wrong you could find yourself in hot water with the liquidator.

If the £30,000 balance at bank is with the same bank as the £25,000 debt however the bank probably has a right of set-off, so would be entitled to clear its debt. This would be perfectly legal and would not get you into trouble. If the accounts are at different banks however, you would be very unwise to use the credit balance to pay off the debt without first having taken advice on the implications for you.

One of my colleagues has seen an IP who's said that their fees are £8k, so that'd leave us with about £22k in the bank to cover the £25k loan meaning£3k would have to come out of our personal money.

Make sure you understand what the £8,000 actually covers. Is this just the fee for putting the company into liquidation, or the fee for the whole liquidation? The two are very different. Get it in writing before proceeding. Furthermore, the point I have raised about bank set-off is very important.

A couple of our creditors have threatened to take us to court so I’ve got a feeling they’ll object if we were to just try and winding up the company by applying to Companies House.

The voluntary dissolution and striking off process (which is what you are alluding to) is wholly inappropriate in the circumstances you have outlined because of the levels of assets and liabilities.

Would anyone be able to give me some advice on how to approach this?

A couple of final questions:
I understand employees’ salaries gets treated as a preferred payment. Does this apply to director’s salaries as well, as they’re an employee?

If a company goes into a formal insolvency process (this does not include dissolution/striking off) all employees are entitled to claim on the National Insurance Fund for arrears of pay, holiday pay, pay-in-lieu of notice and redundancy. The Redundancy Payments Office will pay certain amounts (up to a maximum rate of £450 per week currently) and any excess over this becomes a claim in the proceedings. Part of this may be preferential.

If a director has been part of the company's PAYE scheme - evidenced, for example, by a contract of employment, deduction of tax at source, issue of P60s, P11Ds etc. he will probably qualify for the payments I have just described.

Also, the above company is a part-time venture for me as I also work for a financial institution for my ‘day job’. I've heard that if I was to go bankrupt personally I could lose my job (or at least not be able to get another job with a financial institution). Would you know if this is also the case if I’m a director of a company that goes bankrupt?

As I said above, companies don't go bankrupt. You would need to check your employment contract or staff handbook to ascertain if there would be any consequences for you if the company went into formal insolvency.

 

[Spongebob]

If the £30,000 balance at bank is with the same bank as the £25,000 debt however, the bank probably has a right of set-off, so would be entitled to clear its debt. This would be perfectly legal and would not get you into trouble.

I thought this might be the case, but wasn't sure. Thank you Alan, for confirming it.

If the debt and the credit balance are with the same bank, it would seem clear that the first step is speak to the bank and for them to clear the debt, so eliminating any liability under the personal guarantee.

 

[pete_panther]

Thank you for all the replies. A lot of very useful information.

With regards to the bank loan (£25,000) and money in the bank (£30,000) - both are with the same bank and under the company's name. (As far as I remember the agreement had terms regarding 'off-set' etc.)

There's a lot of great information there, but I'm not sure I was clear enough...

can someone confirm whether there is a way we can get get away with paying all the loan off using the company's money and not having to honour the personal guarantee with any of our personal monies?

If we pay the IP £8k we'd only have £22k left, so would have to pay £3k ourselves (personally) which none of us have.

 

[Spongebob]

Pete,

Sorry if I didn't make myself clear; Alan's confirmation of the bank's right to set off means that you can safely pay off the loan from the money in the bank, thus negating your guarantees.

If there is not enough left over to pay an IP, then don't bother with an IP. Just send out the letters to creditors and let them do their worst. You are totally safe personally.

 

[Bob]

Unusually I don't necessarily agree with SpongeBob :redface:
I don't think you should pay off the bank loan. What I think you should do is to explain to the bank that the company is insolvent and that you are ceasing trading and considering appointing an IP. Suggest to them that they may wish to call up the debt and exercise their right of set-off. I think it will be better if the bank just take it rather that your giving it to them

 

[Spongebob]

If you read my earlier posts in this thread that's exactly what I suggested. However, Alan's confirmation that the bank almost certainly has an absolute right of set-off under insolvency law makes the point rather irrelevent.

Whether they take the money or the OP gives it to them the result is the same. The bank has a right to the money and the OP cannot be brought to account for giving it to them. That he escapes his liability under his guarantee at the same time is just a happy occurance that can't be helped.

 

[Bob]

Sorry SpongeBob :redface::redface: Note to self - reread earlier posts in thread
But I still think it would be preferable for the bank to exercise their right of set off after calling up debt

 

[Karimbo]

hey OP.

Dont know anything about this area. But best of luck to you, hopefully yuour next venture is more successful than this.

I may be completely wrong here but I think HMRC might be worth repaying before all else. If there's one party to keep on your good side it's probably HMRC, they may hassle you if you ever decide to start another company. That's my enitely speculative guess.

 

[Spongebob]

I may be completely wrong here but I think HMRC might be worth repaying before all else. If there's one party to keep on your good side it's probably HMRC, they may hassle you if you ever decide to start another company. That's my enitely speculative guess.

Paying HMRC ahead of other creditors is illegal. Best to play things by the book...

 

[Karimbo]

Paying HMRC ahead of other creditors is illegal. Best to play things by the book...

oh wow, that's a first. I was just going by what Theo pafitas said in dragons den. " you can postpone paying off your creditors but you cannot mess with HMRC, they will come in and shut down your business at the drop of a hat". I guess continuity isn't a concern here

A couple were eating into their VAT balance to pay for creditors to make ends meet.

Will it cause problems with HMRC later on if say you went bankrupt oweing a lot of VAT. Will they block you from becoming VAT registered in another company? Or ever taking directorship again?

 

[Scalloway]

HMRC have tightened their debt collection over the years. However once a company has gone bust their options are limited. They can appoint a liquidator if there are assets worth realising in the company, otherwise there is nothing much else.

You are legally obliged to register for VAT if your turnover reaches £79,000 so HMRC could only block you registering voluntarily at an earlier date. You can only be prevented from becoming a director after a lengthy legal process.

 

[arcon5]

If op was to continue trading then keeping HMRC happy is probably correct. Since op has no intention to continue trading then they can huff and puff all they like, but at the end of the day they are in the same boat as other creditors, they can put up (ie applying to have the company wound up) or shut up.

Excellent practical advice here by spongebob (and Alan of course)... It's important to stress though... Do not pay off the loan, just say the right things to the bank manager to make him scared enough to call in the loan and offset the balance.... Major difference if a creditor was to wind you up.

 

[Alan R Price]

The important point here is that the company is insolvent. In this case, there are several options:

• Introduce further capital to meet any shortfall;
• Agreement (either formal or informal) with creditors for extended payments;
• Going concern sale of the business; or
• Cease trading.

If the company is not profitable or cannot be made profitable by making changes to its operations, the first two are non-runners; and the third is only viable if there is somebody else who sees value either in acquiring the turnover the business is currently making or a certain skill or product that it possesses.

If trading on is not an option, there is no point in prolonging the agony: the company should finish any work that can be finished at minimal cost, bill it out and stop taking any further orders. Whether Pete instructs an IP will depend on if he wants to trigger a shortfall to the bank by paying the IP's fees (£8,000 sounds a lot BTW) or if he wants to persuade/allow a creditor to petition and let that creditor bear the cost. It is likely that as soon as the bank hears the company is insolvent and has ceased trading it will exercise its right of set-off - this is usually a simple contractual right and does not need a formal insolvency event to take place.

If there are outstanding book debts (money owed to the company), the proposed liquidator might well be prepared to look to those for his fees.

 

[pete_panther]

Great advice! Having a careful word with our bank definitely sounds the way to go.

We currently have about 2 creditors threatening to go to court with another that's already contacted their solicitor. How do we handle any legal action, given that we clearly can't pay a for a solicitor? Do we just write/call anyone who contacts us and explain the situation?

And if we had to appear in court would we just have to represent ourselves?

 

[StevensOnln1]

Unless you gave any personal guarantees to these 2 creditors just ignore them and let them waste their time and money.

Sent from my GT-P1000 using UK Business Forums

 

[Anon2013]

I was the accountant for a company up to a couple of weeks ago, when the director called and advised he was closing his doors sent all the staff home and told me to do no more work. I have had an email from a creditor today advising that no liquidator/administrator has been put in place and as I am the accountant he is coming after me for malpractice. Does this creditor have any grounds?? Surely once the director has advised I no longer act for him my relationship with the company has been terminated and that is where my responsibilty ends. Should I do anything or is it the directors responsibilty to wind the company up in the correct manner. I have no forwarding address for the director who has moved, he has changed his number and I believe declared himself bankrupt. Where do I stand??

 

[StevensOnln1]

You were engaged by the director, so that's who you have responsibility to for the work you carried out and any advice given. The creditor is clutching at straws and has no grounds to come after you. I would threaten to report him to the police if he continues to harass you.

 

[Bob]

Just a little confused. Were you employed by the company or are you an external accountant in practice? If the former, did you ever act as a shadow director i.e. did you act as though you were a director of the company?

 

[Anon2013]

I acted as an external accountant in the main, there was a period of time where I stepped in as book keeper if you like, dealing with invoicing, chasing debts paying creditors, to help out the director but I never took on any director responsibilities, the final decisions of everything always laid with him. I was paid on a monthly retainer agreed per a contract this remained the same even when I helped out with the extra duties.

 

[Spongebob]

Should I do anything or is it the directors responsibilty to wind the company up in the correct manner. I have no forwarding address for the director who has moved, he has changed his number and I believe declared himself bankrupt. Where do I stand??

There is no legal responsibility for a director to appoint an adminstrator for his insolvent company or for him to place it into voluntary liquidation. The only legal responsibilities a director finding his company to be insolvent has are to cease trading immediately, ensure that no creditors are treated preferentially, and not to plunder the assets.

I'm assuming that there were no significant assets.

It would appear from what you say that the director of this company has acted perfectly properly; if his personal financial position was such that he had to go bankrupt he really had no other option. An insolvency practitioner would have demanded upwards of £5k + VAT upfront to act as liquidator.

If this creditor wants to see a liquidator appointed then he will have to initiate winding up proceedings through the High Court, resulting in the Official Receiver liquidating the company. Of course he won't - he's just huffing and puffing.

As accountant you clearly have no liability here. If the accountant could successfully be sued every time a company went bust there would be no accountants!

 

[Anon2013]

Sponge bob thank you. This was my thoughts exactly there are no assets cans were owned on finance so all gone back. Only other assets were computers but probably only valuing 300/400.

Thanks just wanted to confirm what I thought was right.

 

[Bob]

If the accountant could successfully be sued every time a company went bust there would be no accountants!

Absolutely. Just wanted to make sure that Anon2013 wasn't actually acting as a director

 

[Spongebob]

This bloke's main concern appears to be that no liquidator has been appointed, leading him to suspect that something rum is going on.

You might want to email him back pointing out the simple fact that it is the creditors who appoint a liquidator, not the directors.

In most volutary liquidations the appointment of the directors' chosen IP as liquidator is rubber-stamped at the meeting of creditors, but it is still an appointment made by the creditors.

The alternative to a voluntary liquidation is a compulsory liquidation, where a liquidator is appointed by the court following a winding-up order being made.

 

[pete_panther]

Are there any advantages of using a court appointed liquidator over voluntary liquidating?

To me it seems the same except the company saves money by waiting for one to be appointed by the court. Or is that not the case?

 

[Spongebob]

Absolutely.

For insolvent companies with insufficient assets to fund a voluntary liquidation simply waiting for a creditor to go for a winding up is the best option. Indeed this is the core of the Spongebob Plan:redface:

The end result is exactly the same, except that it comes completely free of charge.

Beware of IPs claiming that the only way to liquidate a company is via an IP!

Of course, if no creditor initiates winding up proceedings, an application should be made to have the company struck off.

 

[arcon5]

Director or shadow director, doesn't give the creditor the right on pursue the individual for a company debt anyway.

 

[Bob]

Director or shadow director, doesn't give the creditor the right on pursue the individual for a company debt anyway.

Agreed, but would raise the spectre of wrongful trading

 

[UK Contractor Accountant]

How many times do you think HMRC will let you form a company, trade for a few years, strip out all the profits so that there is no money left to pay taxes and then apply for Strike off, before they take some form of action against the Director.