Taking money out before starting to close down a business

[fatsally]

Hi,

I would be very grateful if someone could help me with some questions that I have.

I'm currently a director of a limited company that has been trading for just over five years.

As things stand, we're still trading and have stock valued at wholesale of about £80k with retail value about double that. However, it will take through Christmas and beyond to realise that value and our creditors won't give us that time - we owe them about £60k.

Aside from that, due to personal reasons, its looking likely we can't carry on with the business and so may have to stop trading. Our accountant has advised us to withdraw monies owed to the directors and repay any debts that have personal guarantees attached to them before we start any closing down sale. Then, as soon as we start the closing down sale, start paying all the creditors proportionally to the debt owed unless they are needed to carry on the day-to-day running of the business in which case we can pay them in full eg heating.

He told me that there was more than enough potential money in the company to cover the money owed but we just don't have the cash right now. Therefore he said we don't need to worry as we're not trading when insolvent. However, he has said at this point it would be better not to talk with our creditors or reply to emails in case we 'say the wrong thing' but I'm not too sure what he means by that.

I'm not very happy about it but the personal circumstances do mean I need to at least try to get some money out if possible.

Our accountant also gave me details of an insolvency professional his firm works with to handle the process once we have finished our closing down sale. He said they would then take things on from there we don't need to worry thereafter as we're a limited company and so any debt left stays with the company, not the directors.

However, I've read a little on here about insolvency professionals and I am very worried! There are lots of posts on here about insolvency people going after the directors for money they took out of the company before they went bust. I don't think I could cope with that, especially as I would have no livelihood.

Does what my accountant is suggesting sound above board or is taking chunks of money out and paying off certain debts before we start the closing down sale likely to cause trouble later? For what its worth, he's a very traditional accountant and is normally an absolute stickler for playing everything by the book so I'll be surprised if he's suddenly offering dodgy advice.

Its a real bind as it doesn't feel very ethical and I'm feeling quite ashamed about it but I need to try and keep a roof over my kids heads.

I'm actually hoping that we can make enough money from the sale to pay the vast majority off but its impossible to say in advance and now is when I need to make decisions.

Any help and advice gratefully accepted. Thank you!

Sally

 

[Bob]

Best advice on here will come from Alan Price and SpongeBob. I have alerted then to this thread.
You do though need to ensure that you are not trading whilst insolvent and be wary about fraudulent preference.

 

[arcon5]

You have significant assets and owe creditors significant sums - if the creditor applies to have you wound up you could be in serious trouble for preferential treatment to certain creditors, ie yourself.

With a debt of such a size, unless you drive it down drastically they may well be incentivised to actually do such.

How much do you owe other creditors? Including HMRC?

 

[Spongebob]

He told me that there was more than enough potential money in the company to cover the money owed but we just don't have the cash right now.

This is slightly outside my field of expertise as I am only accustomed to insolvent companies with few if any assets!

On the face of it the advice offered by your accountant seems sound enough but I can't help feeling that a better solution would be to consult an insolvency practitioner now and let him supervise the closing down of the company - or even its sale as a going concern.

Given my track record for abusing IPs on this forum I can't believe I've just given the above advice! Just pick the right IP - which in my experience narrows the field down to Alan Price.

 

[Ian J]

Hi,

Our accountant also gave me details of an insolvency professional his firm works with to handle the process once we have finished our closing down sale. He said they would then take things on from there we don't need to worry thereafter as we're a limited company and so any debt left stays with the company, not the directors.

I would suggest talking to the IP that your accountant recommended now instead of after the sale as he will give you best advice on whether you will be breaking the law with what you propose to do.

Be aware though that any insolvency practitioner will be angling for the work and the more assets in the company the more he is likely to be paid for realizing them so he will obviously recommend that he becomes involved now so make sure that his reasons for doing so are sound

 

[UK Contractor Accountant]

Hi,

I would be very grateful if someone could help me with some questions that I have.

I'm currently a director of a limited company that has been trading for just over five years.

As things stand, we're still trading and have stock valued at wholesale of about £80k with retail value about double that. However, it will take through Christmas and beyond to realise that value and our creditors won't give us that time - we owe them about £60k.

Aside from that, due to personal reasons, its looking likely we can't carry on with the business and so may have to stop trading. Our accountant has advised us to withdraw monies owed to the directors and repay any debts that have personal guarantees attached to them before we start any closing down sale. Then, as soon as we start the closing down sale, start paying all the creditors proportionally to the debt owed unless they are needed to carry on the day-to-day running of the business in which case we can pay them in full eg heating.

He told me that there was more than enough potential money in the company to cover the money owed but we just don't have the cash right now. Therefore he said we don't need to worry as we're not trading when insolvent. However, he has said at this point it would be better not to talk with our creditors or reply to emails in case we 'say the wrong thing' but I'm not too sure what he means by that.

I'm not very happy about it but the personal circumstances do mean I need to at least try to get some money out if possible.

Our accountant also gave me details of an insolvency professional his firm works with to handle the process once we have finished our closing down sale. He said they would then take things on from there we don't need to worry thereafter as we're a limited company and so any debt left stays with the company, not the directors.

However, I've read a little on here about insolvency professionals and I am very worried! There are lots of posts on here about insolvency people going after the directors for money they took out of the company before they went bust. I don't think I could cope with that, especially as I would have no livelihood.

Does what my accountant is suggesting sound above board or is taking chunks of money out and paying off certain debts before we start the closing down sale likely to cause trouble later? For what its worth, he's a very traditional accountant and is normally an absolute stickler for playing everything by the book so I'll be surprised if he's suddenly offering dodgy advice.

Its a real bind as it doesn't feel very ethical and I'm feeling quite ashamed about it but I need to try and keep a roof over my kids heads.

I'm actually hoping that we can make enough money from the sale to pay the vast majority off but its impossible to say in advance and now is when I need to make decisions.

Any help and advice gratefully accepted. Thank you!

Sally

Your accountant seems to have given you good advice. How much is actually owed to Directors? Yes you have to be careful not to prefer yourself ahead over other unsecured creditors of the company but if the directors loans are large I personally would have had secured them via a charge over the company assets (stock/debtors book) so that they jumped up the pecking order on a winding up.

Have you spoken to the suppliers to arrange a payment plan? If this is purely a cash flow problem and the company is trading profitabally then maybe it would worthwile to come to some sort of informal arrangement with the creditors to keep the company afloat. Would need profit forecasts and cash flow projections prepared in the first instance to back up any offer made to the creditors - the IP recommnded should be able to help you here.

 

[Dave Shaw]

You are right to be concerned - paying yourselves and creditors you have guaranteed in advance of everyone else is clearly an attempt to remove the personal risk to you if there are insufficient funds to pay other creditors. Therefore doing so is not without risk.

The right thing to do would be to estabish how much there is for creditors and if there is enough everyone is happy and if there isn't all parties are treated fairly.

In terms of establishing what is available to creditors there are a few things to consider:

Is any of the £80k of stock subject to reservation of title claims? If it is all subject to such claims then returning stock to the creditors should extinguish the liability and leave you with a small amount of stock to close down and pay off other debts.

How much can you realistically generate from the owned stock and the timescale. Whilst you are trading there are other costs/liabilities to consider including rent, rates, wages, taxes, etc.

Use an insolvency practitioner to close the company, sell the stock and distribute to creditors. This could result in lower value and higher costs but reduces the personal risk to you of continued trade (and if you try to do it yourself there is a risk that creditors may take action against the company in the meantime).

In reality it may be best for you to wind down any stock you have (and legally own) quickly. You will then have a pot of cash that you can decide what to do with - i.e. is it enough to pay off creditors and you (or a significant proportion of them with their agreement to a full and final settlement) or is a formal liquidation required to deal with these funds.

For this to be viable you need a plan and the agreement of your creditors to give you time to wind out the situation.

Also don't forget to make sure you understand all of the liabilities - for example lease costs for the term of the lease (and dilapidations), employee redundancy, rented assets etc.

I think you should get advice from an Insolvency Practitioner to understand the risks and the practical impact of the various options before you embark on this.

 

[Alan R Price]

Sally

It is true that there are some dodgy IPs around, as there are dodgy solicitors, accountants, bankers, bricklayers, metal fabricators etc. so make sure you pick one that has been recommended.

On the face of it your accountant appears to have given you good advice BUT that advice relies very heavily on the assets realising enough to pay all the company's creditors in full. You say the stock is worth £80k at wholesale value but how much is it actually going to make? At forced sale it might be only 25% of this sum or even less; and as Dave Shaw says, it might be subject to reservation of title claims. What you cannot and must not do is to pay off certain creditors to your own benefit (yourselves/the bank) and run the risk of there being insufficient funds left to pay the "independent" creditors. This is illegal (which is why "insolvency people go after the directors for money they took out of the company before they went bust"!) and could lead to preference claims by a liquidator against the recipients of the payments, combined with misfeasance claims against the directors for allowing those unlawful payments to happen.

As for trading while insolvent, can the company currently pay all its debts as they fall due (do you, for example, have any invoices that are overdue because you don't have the cash to pay them?)? And does the realisable value of the assets exceed the value of the liabilities? If the answer to either of these questions is "no" or "I'm not sure", you should not do what your accountant suggests because if the company goes into liquidation, you will find the liquidator coming after you.

The problem is that your accountant is not an insolvency practitioner and he should not really be advising on insolvency, other than at a very basic level, any more than I should be advising on income tax. Take advice from an IP - a good one will give you an hour or more of free advice on your options and how to manage a wind-down of the operation in a manner that won't come back to bite you on the backside.

 

[Chris Ashdown]

Sally

What you cannot and must not do is to pay off certain creditors to your own benefit (yourselves/the bank) and run the risk of there being insufficient funds left to pay the "independent" creditors. .

Good morning Alan

You have a overdraft for £10,000 guaranteed by sole owner

One area that i do not understand is say at the time you decide to stop trading, and have a overdraft of £10,000, you receive a couple of cheques or even Bacs payments totaling £5000 from pre stop trading customers and pay into the bank, your total overdraft amount is now £5,000

Should this £5,000 somehow been shared among the creditors, yet the account is closed and the owner has limited his guarantee by £5,000

How should it have been handled

 

[Mitcht]

Sally - Speak to the Insolvency Practitioner recommended by your accountant before taking any further action. Paying off debts first where you have a personal guarantee only works if there is enough money to pay all creditors at the end of the day and those creditors are prepared to wait. There is no guarantee that the stock will sell for enough money to pay all creditors nor that such creditors will wait.

Traditional accountants have a broad range of expertise but Insolvency knowledge is very specialised and therefore you need to speak to an expert. Contact your accountants recommended insolvency practitioner who will be happy to spend an hour with you free of charge to give you his opinion.

 

[Alan R Price]

Good morning Alan

You have a overdraft for £10,000 guaranteed by sole owner

One area that i do not understand is say at the time you decide to stop trading, and have a overdraft of £10,000, you receive a couple of cheques or even Bacs payments totaling £5000 from pre stop trading customers and pay into the bank, your total overdraft amount is now £5,000

Should this £5,000 somehow been shared among the creditors, yet the account is closed and the owner has limited his guarantee by £5,000

How should it have been handled

Hi, Chris

There is an argument that if an insolvent company, in the ordinary course of business, pays cheques into an overdrawn bank account which is guaranteed by the directors, those deposits are safe from attack as preferences. Like all these things however it depends on all the circumstances. The intentions of the parties are paramount and it is down to the evidence to establish those intentions. If the overriding intention is to prefer the creditor, it is a preference.

Here are a couple of examples:

• The directors are trying to sell the business as a going concern before putting the company into liquidation to optimise the return for creditors. An offer has been accepted and the lawyers are dealing with the paperwork. The company needs to pay wages to complete work-in-progress that can be invoiced for the benefit of the creditors and continue trading to keep the purchaser interested. In this case, as long as the additional funds realised outweigh the amount paid into the bank it is fairly clear the intention is not to prefer the bank, but to improve the position for creditors, therefore it is not a preference; compare this with

• The directors realise the game is up, shut up shop and shovel as much money as possible into the bank to reduce their potential guarantee liability. In this case, there has been a clear preference because their principal motive is protection of their own positions. What should they do with the unbanked cheques? They should instruct an IP to wind up the company and ask him to clear the cheques through his client account and hold the funds for the eventual liquidator.

We see both types of situation fairly frequently.

 

[Mitcht]

Chris - One very important point to remember when considering whether a person has been "preferred" is whether that person is a connected party.

As most preferences involve either a director or a relation of a director then they are a connected party and therefore in law there is a presumption that there was a desire to put that person in a better position than they would have been had the event not occurred. i.e. it will be for the director/director's relation to show that no desire to prefer existed if challenged by a liquidator not for the liquidator to prove it.​

 

[Chris Ashdown]

Thanks to you both

It's one area of spongbobs plan that has always been unclear along with how you prove any assets are disposed of properly if you dont use a IP

p.s. just a knowledge research if ever in that position, hope to continue trading for many more years.

 

[Spongebob]

Thanks to you both

It's one area of spongbobs plan that has always been unclear along with how you prove any assets are disposed of properly if you dont use a IP

p.s. just a knowledge research if ever in that position, hope to continue trading for many more years.

I think it's largely a question of scale.

In the kind of cases Alan gets involved in, whether it is a voluntary or a compulsory liquidation, the value of the assets will be significant. If there weren't significant assets, he wouldn't be involved, as it is from the realisation of said assets that he collects his fee! Any major disposal of assets or shovelling money into a personally guaranteed bank account will be equally significant and the the motive of the directors clear.

In the kind of cases I advise on here and for whom The Spongebob Plan is intended, there are few assets, few debts to collect, and not enough funds with which to appoint an IP. In this situation I would suggest that the directors should chase up every penny owed, and complete any outstanding work that they can even after the date that they have ceased trading. The monies collected should be paid into the company bank account while it is still active.

While these actions might technically breach the regulations if the bank account is overdrawn and especially if the overdraft is personally guaranteed, I believe that said actions are defensible on the grounds that there was no alternative place to bank the money. No bank is going to open a new account for an insolvent, non-trading company. Collecting debts or even completing outstanding contracts after the company has ceased trading but before formal insolvency proceedings have commenced is perfectly legal. What else is the director supposed to do with the money raised?

I would go further. As previously stated, in these cases the realisable value of any assets is likely to be low - a few grand at most. It is also likely that the value to the director of certain specialist items is far higher if he plans on starting up a new business than the auction value.

I will not advise on this but simply retell my own experience.

I had a small manufacturing company employing 8 staff. Trade took a nose-dive, debts mounted, and I was locked into a long lease which I had guaranteed personally. It became clear the game was up so I found smaller premises on a monthly licence nearby and over a bank holiday weekend moved all the equipment with the help of one member of staff and a removal company.

I then selected the pieces of equipment I wanted to keep, and phoned a dealer friend who came and paid me in cash for the remainder. Within a week I was back up and running with one employee, cheap premises, no debt, and a full order book! I notified all creditors of OldCo (including employees) that the company had ceased trading.

It was well over a year before finally HMRC wound up OldCo and I had to attend a meeting with the Official Receiver. When asked about the assets of OldCo I was perfectly honest. I simply said that I had sold them for cash to a dealer and kept the money myself in lieu of salary owed. This was accepted without question!

I tell this story to illustrate the difference between dealing with an Insovency Practitioner and the Official Receiver. An IP will be looking for every penny he can find, not least because it swells the fund available from which to take his fee. My experiences with the OR's office suggests that they are hard-pressed and underpaid civil servents whose aim is to clear your case from their desk as quickly as possible while ticking all the right boxes and keeping their arses covered!

Give me the OR anyday!

Of course, if you succesfully get the company struck off before insolvency proceedings are commenced you will not have to explain anything to anyone!

 

[Mitcht]

For the benefit of the readers of this thread, I would not recommend directors follow the advice of Spongebob.

I am sure Spongbob will correct me but as I read his last posting, he took assets belonging to his old company and told the Official Receiver that he had sold them and had used the money to pay himself and not other independent creditors. As outlined earlier in this string this is a preference and is illegal.

In addition, he appears to be admitting that he told the Official Receiver that he had sold the assets for cash but he did not tell the Official Receiver (at least according to his posting) that he had kept some of the assets in his new company. As no mention is made to the contrary, I assume that his new company did not pay for these assets. This also is illegal.

As a final point I would agree that the Official Receivers' staff are hard pressed dealing with the current volume of insolvencies with reduced staffing numbers which is why they are very keen to move any liquidation off their desk as quickly as possible by passing the liquidation to an external Insolvency Practitioner who, if they take the job, will find the time to investigate in greater detail what has happened to the assets and how the company's money has been distributed.

Spongbob appears to have been fortunate that in his case this did not happen. Others following his advice may not be so lucky.

 

[Scalloway]

Spongebob's plan works best if there are no assets.

 

[Spongebob]

I would not recommend directors follow the advice of Spongebob.

I didn't give advice. I very carefully stated that I would not advise on this but simply tell my own story.

Of course what I did was beyond the strict confines of the law. I told the story to illustrate how the system actually works, and the simple truth is that the system makes it worthwhile for directors to snaffle a few assets or to pay off the overdraft at the expense of other creditors, particularly if the figures are not large - say under five or even ten grand. The chances are that you will get away with it.

Even if you don't get away with it, all that is likely to happen is that you will be liable to pay the money back. I't like the penalty for nicking a Mars Bar from a newsagents being nothing more than having to give the Mars Bar back. It would be worthwhile having a go at nicking a Mars Bar!

I know from the large number of PMs I get that generally directors of insolvent companies are not over-concerned about doing what the law says - they are more interested in what they can get away with. This is simply human nature.

I take care not to advise people to break the law; however, as a lay person with much experience of the insolvency system I reserve my right to explain the likely outcomes of stretching the legal boundaries.

In other words, what you are likely to get away with.

 

[Spongebob]

I am sure Spongbob will correct me but as I read his last posting, he took assets belonging to his old company and told the Official Receiver that he had sold them and had used the money to pay himself and not other independent creditors. As outlined earlier in this string this is a preference and is illegal.

I've just noticed a serious inacuracy in Mitcht's post.

Selling assets at market value and using the money to pay one's own salary is not preference and most certainly is not illegal. Employees (including directors in respect of salary) are preferential creditors.

 

[arcon5]

The spongebob plan is often not a choice for many, merely their only and last resort. Where each debt in not a vast value, where assets are minimal and where there is no cash then this is the only way - since creditors are highly unlikely to spend £000s petitioning to the courts to wind the company up where there is no prospect of recovering any money and where the size of the debt is to small to justify the expense. In such circumstances creditors often make some threats before retreating, accepting the debt as a bad debt.

 

[Mitcht]

arcon5 - As regards trade creditors spending money thier own money you are probably right in most cases. However personal issues sometimes outway commercial judgment and a trade creditor will petition for the winding up of a company. More likely, however, is that HMRC will petition, even if there is no prospect of a dividend. Also, more and more these days I am seeing that HMRC are objecting to companies being struck off the Companies House Register without going through a formal winding up process.

 

[Mitcht]

Sorry Spongbob but my post about preferences is not inaccurate.

Nowhere in S239 of the Insolvency Act 1986 does it mention that a preference does not apply to a liability that if it had not been settled would otherwise be a preferential claim in a liquidation or other insolvency process. A preference is a preference and if made to a connected party it is for the connected party to disprove this assumption.

 

[Alan R Price]

arcon5 - As regards trade creditors spending money thier own money you are probably right in most cases. However personal issues sometimes outway commercial judgment and a trade creditor will petition for the winding up of a company. More likely, however, is that HMRC will petition, even if there is no prospect of a dividend. Also, more and more these days I am seeing that HMRC are objecting to companies being struck off the Companies House Register without going through a formal winding up process.

Tony

While you and I have to play a completely straight bat and advise only what is strictly legal we both know that in practice things are often rather different, particularly when the amounts involved are small. The purpose of the Spongebob Plan is two-fold: in suitable cases the company is struck off with minimal loss or cost to the public purse; or it may act as a trigger for HMRC to petition. In smaller cases the consequences for the directors are minimal; in large ones they could be more significant, which is probably how it should be.

I agree that the striking off process has been abused and I welcome the news that HMRC are taking a more active role in these situations - and there was a press release from BIS last week that demonstrates they are prepared to petition in relevant circumstances. We will have to see how this all pans out over the next year or two. Perhaps you and I could be busy bunnies.