- Original Poster
- #1
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...
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...
