The Sponge Bob Plan

Discussion in 'Cashflow forum' started by AerialSolutions, Oct 7, 2012.

Thread Status:
Not open for further replies.
  1. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    After a lot of thought and consideration we have decided to liquidate a company we have that has ceased trading but has a few £'s owing with no assets or means to pay the debts off.
    PAYE £20k
    Suppliers £30k
    Directors Wage £3k
    Directors personal credit card £5k (used to buy stock)
    We have a VAT refund pending and should get back approx £9k.
    So heres the question:
    What to do with the £9k or more importantly what am I allowed to do with the £9k?
    Ideally the directors get their money back first as they are the ones in my mind that have invested personal money into this venture. And the thought of trying to pay back this credit card with no income is a real worry, however, Im not sure if this is 'allowed'.
    So if we follow the sponge bob plan what will happen if an OR comes and looks at our accounts and sees the Directors have been paid before HMRC. What will happen? Am I allowed to play the 'sorry I didnt realise' card or do I have to share the £9k around all creditors?
    Any advice would be greatly appreciated. Thanks in advance
     
    Posted: Oct 7, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #1
  2. Scalloway

    Scalloway UKBF Legend Free Member

    16,159 3,416
    Paying the directors before any other creditor would be seen as an illegal preference. I would think the money should be paid equally to all creditors.
     
    Posted: Oct 7, 2012 By: Scalloway Member since: Jun 6, 2010
    #2
  3. Richie N

    Richie N UKBF Big Shot Free Member

    4,039 486
    I would speak to an IP, the "sponge bob plan" may not always work for everyone...
     
    Posted: Oct 7, 2012 By: Richie N Member since: Nov 1, 2006
    #3
  4. InPrintImaging

    InPrintImaging UKBF Newcomer Free Member

    378 80
    As said above, you cannot show need to speak to an insolvency practitioner. You cannot show preference when paying off creditors. The personal credit card is in legal terms just that, personal, which means you will have to arrange that personally and cannot be paid out of company funds in preference to the other creditors. It will credit to your directors loan account. Equally, I suspect it would be risky/highly unwise to pay the directors wage. You don't mention whether that £3k is 1 month that is outstanding. Is there a danger that you could be paying excessive remuneration if a liquidator were to investigate your activities as director?

    I suspect the most serious problem might be HMRC.

    It is not immediately obvious that you are in out of your depth so to speak, but this sort of situation could lead to complications if not handled properly, so seek professional advice.
     
    Posted: Oct 7, 2012 By: InPrintImaging Member since: Nov 15, 2010
    #4
  5. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    The directors wage is over the course of the trading year. £650 per month was paid only when there was enough funds available. Four months without a wage. Im sure I heard somewhere that the only preferred creditor is wages. Staff have been paid - just the director was not.
     
    Posted: Oct 7, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #5
  6. UKSBD

    UKSBD Not a real duck Staff Member

    10,034 1,967
    What is the difference between a Directors Wage and a Wage?

    Is it down to whether you have a written contract of employment or not?
     
    Posted: Oct 7, 2012 By: UKSBD Member since: Dec 30, 2005
    #6
  7. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    That was my train of thinking. If the director is owed wages then surely this is a preferred creditor. Director or roofer or credit controller - all staff employed by the company - all paying PAYE and NI contributions. I hope this is the case. So the £6k gets shared out equally but only if we follow the 'plan' involving an IP will shrink this to a share of £1k
     
    Posted: Oct 7, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #7
  8. Alan R Price

    Alan R Price UKBF Newcomer Free Member

    2,123 1,037
    Paying the directors would, as Scalloway says above, be an unlawful preference and if the company were to go into liquidation, the liquidator could sue you. You could attempt an informal liquidation (pay everbody a fixed percentage -including directors - and apply for striking off) but that has associated risks.

    I think you have to accept that, if you do things legally, nobody is going to get very much. £9,000 is sufficient to cover the costs of a "burial" liquidation by an IP, who would effectively take all your business problems off your hands. The Spongebob Plan is really only intended for situations where assets are minimal and there are only a few creditors.
     
    Posted: Oct 8, 2012 By: Alan R Price Member since: Jul 5, 2010
    #8
  9. UKSBD

    UKSBD Not a real duck Staff Member

    10,034 1,967
    Why would paying the directors wage be an unlawful preference?

    We always here that the company and the employee are separate entities, if it is a genuine wage rather than directors payment does that not make any difference?
     
    Posted: Oct 8, 2012 By: UKSBD Member since: Dec 30, 2005
    #9
  10. Alan R Price

    Alan R Price UKBF Newcomer Free Member

    2,123 1,037
    The important issue is "we have decided to liquidate a company we have that has ceased trading". It is clear the company is insolvent and the director is a creditor - it is irrelevant whether it is for wages arrears or otherwise. Any payment to him cannot be in the ordinary course of business, and the court would draw the inference that the principal intention of any such payment would be to put him in a better position than the other creditors. It would be a preference. An insolvent person giving a preference to a creditor has been contrary to insolvency law since about the 13th century.
     
    Posted: Oct 8, 2012 By: Alan R Price Member since: Jul 5, 2010
    #10
  11. UKSBD

    UKSBD Not a real duck Staff Member

    10,034 1,967
    Thank you,
    so once you have reached that stage, you shouldn't really page anyones wages either? Would the IP go after employees who were paid?

    Also, am I right in thinking there is a Goverment pot that covers unpaid wages when a company goes bust?

    If so, is an ex director treated as a normal employee if he had a proper contract of employment?
     
    Posted: Oct 8, 2012 By: UKSBD Member since: Dec 30, 2005
    #11
  12. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    If someone could advise on our best course of action? Im quite worried and now we have had our VAT audit the refund is on its way to us. My creditors have all started ringing again asking when they will be paid. Should I start telling the truth adn write to them all or pay the £5k to an insolvency expert and be done with it all?:|
     
    Posted: Oct 11, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #12
  13. Dave Shaw

    Dave Shaw UKBF Newcomer Free Member

    230 43
    If their employer enters insolvency then they can claim certain amounts from the government's redundancy payment service (part of BIS). This includes redundancy, arrears of wages and holiday pay subject to weekly limits.

    A director may be an employee but the redundancy payment service look more closely at the situation to decide whether they think the director was a true employee. If they think that the director is not then the director can appeal to an employment tribunal.

    Typically an IP will not go after employees that have been paid in good faith - they are more likley to go after the director for making the payment especially if they knew that they shouldn't.
     
    Posted: Oct 11, 2012 By: Dave Shaw Member since: Nov 6, 2008
    #13
  14. UKSBD

    UKSBD Not a real duck Staff Member

    10,034 1,967
    Thank you

    So in the OP's case, if he was a genuine employee of the company and had a contract of employment, he could claim any wages owed to him from the redundancy payment service?

    Could he claim his full £3k or is there a limit?
     
    Posted: Oct 11, 2012 By: UKSBD Member since: Dec 30, 2005
    #14
  15. Alan R Price

    Alan R Price UKBF Newcomer Free Member

    2,123 1,037
    UKSB

    Strictly speaking once the directors have decided to wind up their company they should not pay anybody, including the staff. There may be justification to pay certain limited amounts for carrying out essential work that will benefit creditors - such as completing work-in progress or outstanding orders so they can be turned into invoices the liquidator can collect on; but the general rule is that everyone must be treated equally. A 1988 case, West Mercia Safetywear v. Dodd, confirmed this.

    As regards payments to employees, if the amounts were large enough, the liquidator might well sue them; and he would certainly go after the directors if they had deliberately preferred the employees.

    The redundancy payments fund provides for employees' claims for pay-in-lieu of notice, holiday pay, redundancy pay and arrears of pay, up to a maximum (currently) of £430 per week of each entitlement, to be met from public funds. If the director can show that he was an employee, paid under PAYE, with a bona fide contract of employment, he will usually qualify for payments from the RPF. Claims can only be initiated however once a formal insolvency procedure is in place.

    AerialSolutions

    I think you should talk to an insolvency practitioner (but then I would say that, wouldn't I?). At very least, he or she will confirm what your options are and advise of any potential risks for you personally as a director. Give me a call if you like - I don't charge for an informal chat. Or ask your accountant to recommend an IP.
     
    Posted: Oct 11, 2012 By: Alan R Price Member since: Jul 5, 2010
    #15
  16. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    Well! Looks like we have no option but to revert to the Spongebob Plan! Our £9k VAT Refund has been paid straight to PAYE/NIC. So thats the end of that - No IP for us. We have decided we have no other option but to do nothing and wait for HMRC to send in their OR. And I shall have to write-off my £5k personal credit card bill...
     
    Posted: Nov 6, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #16
  17. Alan R Price

    Alan R Price UKBF Newcomer Free Member

    2,123 1,037
    Good luck. Dealing with the OR is not too stressful nowadays - they are really only look in depth at bigger cases (debts £100k plus) and nothing you have said indicates that you have done anything seriously or intentionally wrong. It may be that the company is just struck off without liquidation - in which case, you are unlikely to hear much more.

    If you do have an overdrawn director's loan account, if the company goes into liquidation you may find you are asked to repay it. In this case be straight with the OR/liquidator and you should be able to negotiate a deal. HMRC cannot pursue you personally for an o/d director's loan.
     
    Posted: Nov 7, 2012 By: Alan R Price Member since: Jul 5, 2010
    #17
  18. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    Hi Alan - Thank you for your calming words. Much appreciated. Debts outstanding now are PAYE and suppliers amounting to probably about £40k. I have discussed our position with a recommended IP and he suggested to do nothing. That doesnt st comfortably so I think I will ring PAYE to confirm they have had our £8k VAT refund and tell them the truth. This may or may not spur them into action. As Directors we have taken nothing from the company apart from the minimum wage of £650 per month and this was not every month by any means and only one of us took this wage not both of us.
     
    Posted: Nov 7, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #18
  19. Homshaw

    Homshaw UKBF Enthusiast Free Member

    811 99
    I know its a little off the subject and if you don't want to answer I understand but I am quite interested in what makes businesses succeed or fail

    I thought with the digital change over aerial businesses would be doing beter than most at the moment and i was wondering what went wrong
     
    Posted: Nov 8, 2012 By: Homshaw Member since: Apr 18, 2008
    #19
  20. AerialSolutions

    AerialSolutions UKBF Regular Free Member

    340 32
    It was our 2nd business that failed. Solar.

    Feed in tariff cuts, clients going bust leaving us with unpaid invoices. Paying wages when there's no customer sales...

    Luckily we learned a lot and now sub-contract and install commercial installations.

    The aerial side is steady away. People move house, build extensions buy tvs for bedrooms etc., and there's always wind!!
     
    Posted: Nov 8, 2012 By: AerialSolutions Member since: Jun 17, 2009
    #20
Thread Status:
Not open for further replies.