Insolvency - worried about liabilities.

[george_85]

Hi,

I run a small one man band limited company. We've had no issues at all since inception 8 years ago, though 2023 has proven to be a nightmare. The company offer IT services - I've tried to grow it, though since Covid the company would be indistinguishable from an IT contractor ltd company.

I ended up having to leave a client at the end of 2022, and the market was a nightmare - it took me months to find new work, and have ended up taking whatever I can to make ends meet, which is paid employment.

A bit of info about our company finances - We took out a bounce back loan during covid with around 12k left to repay. We will owe corp tax to HMRC for a similar amount. All VAT is paid, and there's an overdrawn director's loan account that I'll be repaying from personal income over the next few days.

Until this week, my intention was to find more work through the company, though the market is just not there. I want to be realistic that I might not be able to get the business' finances in a good spot by January, when HMRC payment becomes due.

After making that realisation, I've taken a look at the company accounts, and there are issues from January 2023 onwards. We didn't have any income, so continued payments to personal account from the business as dividends - to keep roof over head. I've checked the PnL on an 'as-at-date' basis and can see that we haven't had profit to distribute in 2023, so I see a potential personal liability.

2022 looks fine, though we rode the line of profitability pretty close as I had to work part time to support some health issues in the family. a CVL looks like a reasonable option, though I'm a bit worried that we could be taken to the cleaners by an IP, ending up in a situation where we're personally liable not only for all of the company's liabilities, but for some hefty insolvency fees too.

Anyway - this sucks. How bad of a situation is this?

 

[Gyumri]

Anyway - this sucks. How bad of a situation is this?

It's not that bad. Where's the issue?
You owe the company money. Let HMRC or some Good Samaritan wind up the company in a couple of years time. The OR may send you a polite note asking how you intend to pay back the loan so I would put your feet up in the meantime.

Others may take a more formalistic "tut tut" view of your position.

 

[JEREMY HAWKE]

It's not that bad. Where's the issue?
You owe the company money. Let HMRC or some Good Samaritan wind up the company in a couple of years time. The OR may send you a polite note asking how you intend to pay back the loan so I would put your feet up in the meantime.

Others may take a more formalistic "tut tut" view of your position.

I agree with the above you are not in hock to anyone in a large significant way.

If you wish to wind it up it still would be of benefit to use an IP

 

[japancool]

What did you do with the BBL?

And how much are the illegal dividends you took out?

 

[ChrisCallaghan]

Hi @george_85 ,

I'm sorry to hear about the situation you find yourself in with your company. Unfortunately I have spoken to many professionals in the IT sector in the last couple of years who have experienced almost exactly what you're going through. The 2021 IR35 changes certainly doesn't help.

As others have pointed, you are not personally liable for your company's BBL or HMRC liabilities. The only notable exceptions are if the BBL was not used for your company's economic benefit, and/or the balance of any overdrawn director's loan account (which I understand from your post that you are repaying shortly?).

Given that any chance of recovery for your company seems unlikely at present, I think you have the right idea - moving towards closing your company. In simple terms there are 2 avenues you can go down.

The first of these would be what is known as the SpongeBob method on this forum, which others have already hinted at. The full guide is below:

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...

www.ukbusinessforums.co.uk

Please note that this guide was written long before Covid and BBLs. It is still applicable today, but it is worth noting that it now takes much longer. BBL lenders object to any dissolution action they see, and it is typically taking over two years now for them to cease to object. Hopefully HMRC would come forward sooner than that to wind up the your company through the courts (aka a Compulsory Liquidation). Unfortunately it is difficult to give timescales on this.

The major positive with Spongebob's plan is that you will not to pay any professional fees. The negative is time, and whilst the company still legally exists, creditors can still contact you for any debt collection activities (though it is worth stressing here that you would still not be personally liable for HMRC & BBL liabilities).

The alternative would be to instruct a licensed insolvency practice to liquidate the company. This would be much swifter and, crucially, creditors cannot object to it. The negative, as you have guessed, is that there will be a cost to this process.

May I ask how much your overdrawn directors loan account is? If you are planning on repaying this, that amount can go towards a liquidators fee. Furthermore, we can agree a set fee, to ensure you know, in advance, the total costs. Myself or any of the insolvency regulars here on UKBF would be happy to give you a quote, with no obligation. A consultation would also allow an insolvency practice to advise of you all the ins and outs of a liquidation, your rights as director, claiming redundancy etc.

Either of these options are perfectly valid, and the choice between them is largely down to affordability and director preferrence. If you would like to have a chat about these options in more detail (again, free of charge and of no obligation) please call or drop me a message.

 

[Frank Wessely]

Hi @george_85

The summary from @Chris Callaghan covers the main issues for you to consider. The good thing is that you have a fair degree of clarity to start with which often is not the case.

To address the point of whether dividends have been drawn "illegally", this may not be a black or white decision of yes, the 2023 dividends were all illegal. More information is required which can be discussed in a free initial consultation. The main point being that if you do decide to instruct an IP, you know what to expect and there are no nasty surprises.

Thanks.

Frank

 

[JEREMY HAWKE]

I will repeat the record that The Sponge Bob plan was for people who really had nothing and being written before the BBL handouts could put the director in a difficult position as the bank can not claim the losses back until they have explored all avenues so tread very carefully in this situation and get advice from one of the IPs on here

 

[ChrisCallaghan]

To address the point of whether dividends have been drawn "illegally", this may not be a black or white decision of yes, the 2023 dividends were all illegal

@Frank Wessely makes a good point. It would be sensible to do a draft set of accounts up to a recent date to get an accurate and up-to-date figure for your director's loan.

 

[george_85]

Hi everyone - I really appreciate your responses here. It's odd, what is 'end of the world' stuff from my perspective I guess is the 'everyday' for those of you in the profession - I appreciate the level heads. I'm going to take a few days to think about what the best course of action will be. I don't like the idea of waiting around for a couple of years ie the spongebob plan (can't believe I've just typed that) and potentially being at the mercy of legislation changing etc.

 

[ChrisCallaghan]

the spongebob plan (can't believe I've just typed that)

Sometimes when I'm advising clients who have who have not come to me from UKBF, I accidently refer to The Spongebob plan by that name, and the client thinks I have momentary lost my marbles. ?

 

[Lisa Thomas]

I agree with the other comments. The best way to get an understanding of an IP and the CVL process is to speak to one or two and research them. I offer a free initial chat and I suspect so do Chris and Frank.

You are conflicted with your DLA so agree it would be best for you to establish how much it is so you know what the starting point is. Depending on your personal financial position there may be some wriggle room for allowing discount and/or time to repay it in instalments via a CVL.