A day doesn’t go past without our receiving a call from a director desperate for advice on what to do with their insolvent company. In many instances, there is no viable business left to save and the cupboard is well and truly bare – there are either no or hardly any assets of value in the company and the director has sunk every penny they have in the business, so it’s a question of how best to close the business.
Creditors’ Voluntary Liquidation (‘CVL’) and Compulsory Liquidation are two of the main options I discuss with directors. Each ultimately result in the same thing, the closure of the business and the dissolution of the company, but how they are entered into, who does the work, and the costs involved are very different. And it’s vital that directors understand the key differences so they can make the right decision as to which process to enter into.
The image above this post compares the two processes, please take some time to understand it. (And if you don’t, just call me)
You are ready to learn about the real kicker…
And if you go away from this blog noting nothing more than this, your time has not been wasted…
Insolvency practitioners are often asked to give a verbal, over the phone, quote to directors for putting their company ‘into liquidation’, the CVL type. They will often quote a fixed fee of let’s say £6,000…a not inconsiderable sum of money.
The directors typically go away with the distinct impression that the quote covers the whole of the assignment because to them the cost of putting a company into liquidation means everything from start to finish.
It doesn’t because there is a huge communication disconnect between the IP and the directors – the IP’s £6,000 quote merely covers the period when he is working with the director to put the company into liquidation – ie up to and including the members’ meeting at which the company goes into liquidation and the timing out of the creditors’ decision procedure – because to the IP that’s what putting the company ‘into liquidation’ means. To the directors it also means the IP carrying out the liquidation, to the IP it doesn’t.
I have seen many directors caught out by this, but I hear you say ‘what does it matter?’…
It matters a lot when there are insufficient or no assets to pay the Liquidator’s costs and the director has given a personal guarantee (‘PG’) for those costs – the director believed he was signing a PG which was either not going to be called on or they knew the extent of the call, but in reality all they have done is handed the liquidator a personal, blank, cheque because once the company is in liquidation, the director has no control over the level of fees / costs incurred by the liquidator (only the creditors and liquidator do).
Why do I write this post now?
It’s been prompted by a situation I saw a few days ago where I fully expect the directors of a company to see a call for over £35,000 from the IP on the personal guarantee they had given for a CVL started off just over 2 years ago. The directors thought they’d paid all that was expected of them, £5,000, under the guarantee they had signed, but this only represented the ‘pre-liquidation’ costs – the IP’s quote for putting the company ‘into liquidation’. They had paid the £5,000 but the PG was unlimited as to time, what services it covered when and quantum. And unlike Compulsory Liquidations – which are effectively subsidised out of our taxes because they are conducted by a government department – CVLs are not subsidised (that is other than by you if you have given a personal guarantee!).
There are two learnings from this story…
It is absolutely vital that you understand exactly what you are signing, that you read the fine print and not just jump at what appears a good deal. And this applies even more so where the level of realisable assets is low, or there are no realisable assets. The old phrase ‘if it sounds too good to be true, then it probably is’ comes to mind.
If you are calling an IP for a quote for a CVL, you are probably asking the wrong question. And if he does not explore with you in detail the financial position of the company and is not absolutely clear as to what his quote covers, it could hurt you a lot financially… sure, maybe not right now, but sometime down the line it will.