CLOSING A LIMITED COMPANY WTH INSUFFICIENT FUNDS WITH WHICH TO PAY AN INSOLVENCY PRACTITIONER

CLOSING AN INSOLVENT LIMITED COMPANY WITH INSUFFICIENT FUNDS WITH WHICH TO PAY AN INSOLVENCY PRACTITIONER



If a company is unable to carry on trading due to becoming insolvent the standard procedure for closing it down is for the directors to appoint an Insolvency Practitioner to liquidate it. The IP will realise the value of the company’s assets and after deducting his fee distribute the proceeds amongst the company’s creditors.

This procedure works well enough if there are sufficient assets within the company to cover the IP’s fee. If however, there are insufficient realisable assets the IP will insist on his fee being paid by either the company or the directors upfront – typically in the region of £5,000 + VAT. It is very common for unscrupulous IPs to tell directors of such companies seeking their advice that they have no alternative but to appoint a liquidator and that this is a legal requirement.

This is exactly the situation I found myself in some years ago. I had two companies trading out of the same premises in similar lines of business and both were in serious trouble. I consulted several Insolvency Practitioners for advice and received absolutely nothing but demands for nearly £10,000 and the promise to make all my problems go away. I was told that the only way to close my companies and to stay on the right side of the law was to appoint an IP. The problem was that I barely had £10, never mind 10 grand!

After some research however, I realised that I had been lied to. There is absolutely no legal requirement to put an insolvent company into voluntary liquidation, and certainly no legal requirement to appoint an IP. Effectively all that is required in law is that a company finding itself to be insolvent must cease to trade, and that all creditors must then be treated equitably.

I was able to find a path through the insolvency minefield, and for the last five years have made it my business to share these findings through these forums with countless people unfortunate enough to have found themselves in a similar situation. This pathway has become known as ‘The Spongebob Plan.’



THE SPONGEBOB PLAN

It should be reiterated at the outset that The Spongebob Plan is suitable only for small insolvent limited companies with insufficient realisable assets to cover the cost of a voluntary liquidation via an Insolvency Practitioner. It should be remembered that physical assets such as stock and equipment typically only raise a fraction of their book value in liquidation while debtors are proportionately more valuable. Speak to a few IPs and if you can get one to work on the basis that his fee will come from the disposal of the assets then go with it. Under no circumstances however, sign a personal guarantee to cover any shortfall. If an IP demands such a guarantee then this rather proves that your company is a candidate for The Spongebob Plan.



Step 1 Cease Trading

The principal responsibility in law that a director of a limited company finding itself to be insolvent has is to cease trading. No further contracts, either sales or purchase, should be entered into, and work on long-term contracts should cease.

If the company occupies leased premises then my advice generally is to vacate them immediately. All equipment and stock should be removed to a place of safe keeping such as a storage facility or friend’s garage. Landlords tend to be very quick off the mark sending bailiffs in if they suspect that a tenant is in financial difficulties, and bailiffs acting for other creditors will also be thwarted if no assets remain at the business premises . It is in the interests of the equitable treatment of all creditors to remove any assets from the reach of bailiffs acting only for one. It also preserves your control of the situation.



Step 2 Write to Creditors

This is the key to the whole strategy.

Adapt the following letter and send a copy to all creditors.



Dear Sirs,


Re XXXXXXXX Ltd


It is with deep regret that I must inform you that the above company has ceased trading due to becoming insolvent. The difficult decision to cease all trading activities has been forced upon me so as to comply fully with my responsibilities in law as a company director.

Unfortunately the company has insufficient realisable assets and no funds with which to appoint an insolvency practitioner and thereby initiate a voluntary liquidation. I am not in a financial position to fund this personally, having now lost my livelihood.

The company therefore, will now lie in a state of ‘limbo’ until either Companies House strike it from the register or a creditor winds it up through the High Court, leading to the Official Receiver being appointed as liquidator. As you are a creditor of the company I would ask that you consider taking this step so as to bring about the early resolution of the company’s affairs.


Yours faithfully,



Director

XXXXXXXXX Ltd



The effect that the receipt of this letter has on creditors is interesting. Trade creditors in particular will generally take the view that nothing is to be gained from throwing good money after bad and pursuing matters further. They will certainly not go the expense and hassle of winding the company up and so nothing more will normally be heard from them.

Continued...

 

Step 3 Debtors

You should actively chase up any money owed to the company before it becomes common knowledge that it has ceased trading. Offer generous settlement discounts to elicit payment from reluctant payers – just get as much money in as you can as quickly as possible.

If you have given the bank a personal guarantee on the company’s overdraft facility and the account is overdrawn, then technically to pay down the overdraft could be seen as preferring the bank as a creditor to your own advantage, as your liability under the guarantee is reduced. Strictly speaking, monies received from debtors should be ring-fenced in a separate account with another bank for the benefit of all creditors. Practically however, this is next to impossible because no other bank is going to open an account for a company which has ceased trading.

You should be aware that there is a possibility that should a liquidator ever be appointed that he may seek to claim back from the bank any monies paid into the company account after the date when the company ceased trading. The effect of this would be to return the director to exactly the same position that he was in to start with; there is no penalty for breaching the law in this way so long as no intent to defraud can be proved – which is extremely difficult to do. Consequently, it is almost certainly worth taking the chance.

Step 4 Apply for Strike-Off (optional)

Three months after ceasing trading you can apply to Companies House to have the company struck off the register using form DS01 which can be downloaded from their website. Copies of the application should be sent to all creditors, who will be given the opportunity to object to the striking-off. Generally HMRC will object if they are aware of any monies outstanding, but most other creditors will not bother unless they have a particular axe to grind.

If an objection is received you will be notified of it by Companies House. Do not worry – it is only to be expected. The right to object is given to creditors to allow them to take the appropriate action in pursuing their debt– which effectively means one thing; winding the company up.

The only creditor likely to wind anyone up is once again HMRC. If no winding-up petition is received from them apply for strike-off again after a further three months. Anecdotal evidence suggests that Companies House will tire of successive objections and strike off the company anyway.

The striking-off process might be put off-course if HMRC or another creditor issues a County Court summons against the company. While this in itself is not a problem and can safely be ignored it does preclude further applications using form DS01 as it is specifically stated that the company must not be subject to legal proceedings for the application to be submitted.

My own personal view is that applying for strike-off is not really an essential part of ‘The Spongebob Plan’ unless the overdraft has been paid down as above or the Directors Loan Account is overdrawn.

If a director owes money to his company, commonly as a result of taking ‘dividends’ unsupported by retained profits, a liquidator may seek to reclaim the debt as an asset of the company. If however, the company is struck off without a liquidator ever being appointed, no-one other than the director and his accountant will ever know about the overdrawn DLA. Consequently it makes sense to submit an application. There is much to gain and nothing to lose.

The most extreme example of this that I know of was that of a member of this forum who asked me for advice about his insolvent company a couple of years ago. His DLA was overdrawn by £40,000 and he hadn’t submitted any returns to HMRC for a long time; consequently they weren’t aware of any debt owed to them. I suggested that he kept it that way and applied to have the company struck off, sending HMRC a copy of the application as prescribed. I didn’t really expect it to work but thought that it was worth a punt. There wasn’t anything to lose.

A few months later I heard from him saying that his company was now ‘Dissolved’ according to the Companies House website and what did this mean? I was able to tell him that he was forty grand better off and that he owed me a pint! Best of all, as far as I can tell he hadn’t actually broken any law.



Step 5 Winding Up

In my company insolvencies, HMRC issued Winding Up Petitions through the High Court after failing to enforce County Court Judgements against my companies. I can therefore say from personal experience that the best course of action is to ignore it. Simply let matters take their course.

Eventually you will receive a letter from the Office of the Official Receiver informing you that the company is now in liquidation. You will then have to complete a questionnaire and attend an interview at the local OR office.

In my experience the interview is nothing to be worried about; just remember that no-one likes a smart-arse and that the OR staff are modestly paid over-worked civil servants. Treat them with respect and enable them to tick their boxes and you will be fine. If they can close your file by the end of the day they will be delighted – help them achieve this. Rub them up the wrong way however, and they will take pleasure in making your life a misery.

If everything goes well you will find the company’s status change from ‘in liquidation’ to ‘dissolved’ on the Companies House website a few months later.

And that’s that. Job done. The company has been closed perfectly lawfully without the need for an Insolvency Practitioner.



Good luck and let me know how you get on.

 

I knew I'd forget something!

If you do apply to have the company struck off and there is a credit balance in the company bank account (however unlikely that may be!) take out the money and put it somewhere safe. If the company does get struck off the bank will freeze the account. The funds and any other assets then become the property of the Crown, so just wait for the Queen to come round and pick them up.

Needless to say, she won't because nobody knows about them!

 

This thread has been made into a sticky - many thanks to Spongebob for such a detailed and thorough contribution to help people facing insolvency We've also closed it so that the first post remains the focus - please feel free to discuss any aspects in new threads inside the Insolvency forum.

We hope everyone finds it useful but please remember to use this information responsibly. Everyone's situation is unique so it's often a good idea to contact a specialist directly to discuss your case.

 

One question I get asked with regard to Voluntary Liquidation is whether people can set up another limited company and act as a director of the new company with any risks or consequence from having gone through a voluntary liquidation.

Are there any tips or advice to share with regard to this?

This generally expands into ... can I keep the website from the old company? Can I use a similar name? Can the new company buy assets such as vehicles, equipment or stock?