You are a director of a company that is struggling massively. Here is a question for you…
Who pays to liquidate your company?
Simple question, you would have thought?
There is a short answer – the company pays to liquidate itself… but the answer is not that straight forward…
Sure, in a solvent, members’ voluntary liquidation, the position is very simple… the company directly, and because the company is solvent, the shareholders indirectly, pay for the liquidation.
But in an insolvent liquidation, it’s not so simple, because there is nothing in statute requiring the shareholders or you as a director to pay for any liquidation…
Going back to the short answer of ‘the company pays to liquidate itself‘, where there are sufficient assets in the company to pay for an insolvent liquidation, whether that be a Creditors Voluntary Liquidation or Compulsory Liquidation, the costs of the liquidation are paid out of company funds / assets, and are therefore paid indirectly by the creditors – we operate in a country where the creditors of companies fund the insolvency process (how many ever appreciate this is the situation?).
But what happens if there are not enough realisable assets / likely cash to pay for the liquidation?
Did the statement ‘there is nothing in statute requiring the shareholders or you as a director to pay for any liquidation’ come as a surprise to you? That there is nothing in the law to require you, who might be at least in part responsible for getting the company to the condition it’s currently in, or who reaped the benefits of hitherto profitable trading, to finance cleaning things up?
Yet you may want – and often need, in order to avoid creditor criticism for carrying on too long, or even worse a claim being made against you for wrongful trading or your being disqualified – to bring the company to an end, placing it in the hands of a liquidator, quickly. How do you do that if the level of money to pay for the liquidation process simply isn’t there?
These are your options if you find yourself in that position:
- Of course, you as a director (or indeed any director or shareholder) could pay personally for a creditors voluntary liquidation.You can pay a fixed sum up front. You could pay an amount now and give the liquidator a personal guarantee for the balance of his fees (say payable on you being paid redundancy and pay in lieu claims by the Redundancy Payments Service). Or you could just give a personal guarantee which you hope will only be called upon in the event that there should prove to be insufficient realisations to pay the costs. Many insolvency practitioners ask directors for personal guarantees, it’s commonplace.The problem is often that guarantee does not contain an upper limit, so by signing it you are effectively giving the insolvency practitioner a blank cheque, which he can cash in some time later on, charging you fees at what are by comparison to other service providers high hourly rates (and which they can increase at their own choosing).Me personally, I don’t ask directors for a personal guarantee – my view is the wrong process is probably being proposed if the IP has to ask for a PG.
BTW, if you are asked by an IP to give a personal guarantee, you should assume that the costs of a basic, uncomplicated, CVL are a minimum of £5,000; a CVL of a small SME with a few issues such as employees to deal with, £10,000; and I’ve seen instances of personal guarantees being pursued by IPs for tens of thousands of pounds.
Oh, and don’t rely on any money coming to you from the RPS, it’s far from guaranteed.
- The company, you or the shareholders finance a Compulsory Liquidation. This is a much slower process to get into, but conversely the costs you pay are far lower – typically £2,000 – and as the liquidation has, by law, to be conducted by a civil servant, the Official Receiver, and cannot charge the costs of doing so to you or the shareholders – ie you avoid giving a personal guarantee or financing the process (with the possible exception of the £2,000).
- You do nothing, you simply wait for a creditor to petition for a Compulsory Liquidation. This isn’t ideal as there may be criticism levied at you as described above, but if you haven’t got the £2,000 or so to fund the start of a Compulsory Liquidation, this may be your only realistic choice.
There are obviously a good many other issues that you should take into account when choosing the best insolvency process for you and your company, as costs and who pays are just one factor. If you’d like me to assess your options with you, call me on 07813 102014.