FREQUENTLY ASKED QUESTIONS
Answers to some of the Questions we get asked...
Q1. What are the main advantages of creditors’ voluntary liquidation?
That’s an easy one. The principal benefits are:
- avoiding the risk of “wrongful trading” claims
- the debt situation is crystallised so that the unsecured amounts owed to creditors are fixed as at the date of liquidation (good for all sides in the long run)
- peace of mind and an end to creditors pressing for payment
- the creditors have the satisfaction that the Director’s conduct will be independently reviewed creditors know that the assets will be sold for true value and legally
Q2. What about the bank account? I think I guaranteed it! Wait a minute I may have guaranteed my trade accounts too!
Generally speaking the “veil of incorporation” means that the company’s debts are the company’s problem. In certain circumstances creditors will have reduced their exposure to bad debts by taking some form of security.
For example, if the company has borrowed money from a bank, it is very common to give some form of security. This is usually by way of a debenture, which will mean that their debt ranks higher in the order of priority than normal creditors, but it is often backed up with personal guarantees from the Directors.
Nowadays banks are extremely careful with about making sure personal guarantees are properly enforceable against the guarantor. Where the assets realised by the liquidator are not likely to be sufficient to repay the bank in full then the bank will probably seek to enforce the personal guarantee you have given for the shortfall. Banks will often negotiate and settle for less than the total liability and there are specialist advisors we can recommend to assist in this regard.
Q3. Do HM Revenue and Customs have any special rights compared to other unsecured creditors?
It may be important to realise that under the most recent rules preferential claims by HMRC rank ahead of claims secured by floating charges, such as bank loans backed up with debentures. Anyone who has given a personal guarantee of such a loan should be aware that assets in a liquidation will first be applied to pay outstanding taxes before the bank’s charge applies. Also, where a Director has supported their loans to the company by a floating Debenture charge, their claim ranks after Employee entitlements for wages and holiday arrears and all HMRC claims except Corporation Tax.
In addition, HMRC can and often do take legal action to wind the company up for unpaid taxes. Even when trading has ceased and strike off action at Companies House can be blocked if it is believed that a tax liability is outstanding.
Although time to pay arrangements for accrued taxes will often be considered, if properly prepared, these can be burdensome on a company that is facing continuing difficulties and poor performance.
Most company Directors do not encounter this problem because the PAYE or VAT underpayments have not been allowed to build up for too many months and/or the debt is relatively small. However, the amount and proportion of tax debt in a liquidation or administration is a specific factor considered by the Insolvency Service in identifying potential director disqualification proceedings.
Q4. What if I sell the company assets to my brother-in-law for £100
Well if that’s what they’re worth then it is fine. If they’re worth more, then, that would be, in insolvency terms, a “transaction at undervalue”,
It probably won’t surprise you know that it’s a “bad thing” which can result in:
- The transaction being reversed
- Negative comments on the Director’s conduct report
- It’s a breach of Directors duty to the company and indicative of bad faith
It’s a lot simpler and safer to buy the assets for fair value from the Liquidator, He will probably offer you deferred terms if you don’t have the cash on the hip to buy them.
Q5. There are a couple of family members/suppliers/employees I want to look after…
This sounds like a preference. This occurs when a company pays a creditor, and by doing so makes that creditor “better off” than the majority of other creditors, before going into liquidation. The company has to want the creditor to be better off for this to be a problem, so, for example, paying under duress when somebody is threatening to remove goods might not be a preference. Desire to prefer is assumed in payments to connected parties (like family members).
We understand that certain suppliers or employees may be key to your next business, while others are not, and that, naturally, you want to make liquidation as painless as possible for them. Basically, what you do with your own money is up to you but you shouldn’t use the company’s money to “prefer” a particular creditor over the others.
It probably won’t surprise you know that it’s also a “bad thing,” as in 7 above, which can result in identical consequences.
- The transaction being reversed and action against beneficiary
- Negative comments on the Director’s conduct report
- It’s a breach of Directors duty to the company and indicative of wrongful trading
Q6. I have sailed close to the wind on a few matters, you had better give me the low-down on wrongful trading.
Wrongful trading is basically where the Director(s) of the company failed to act as they should, when they knew (or reasonably ought to have known) that the company was insolvent. When a Director realises his company is insolvent he/she should:
- Take steps to protect the creditors’ position, treat them equally too
- Not take further credit that will worsen the position of the company overall and that cannot be repaid
- Bring the HMRC and Companies House filings up to date as far as possible
- Document what they have done and why
- Seek advice
- Undertake transactions at undervalue
- Make preferences
- Draw dividends where there may not be reserves to cover them
- Take credit from suppliers where there is no “reasonable prospect” of paying them problems.
Just making a mistake does not result in wrongful trading unless you didn’t act in good faith when making it.
Q7. There is, or soon will be, a petition to wind up (or liquidate) the company. Shall I just let it go through and save myself a few bob?
The company Directors don’t get to choose and suggest who will be the liquidator following a Court winding up. Initially a government official called the Official Receiver (OR) will be appointed to deal with the company and, thereafter, the company’s creditors, if they hold sufficient voting rights, can replace the OR with a liquidator of their choice.
Now theoretically it doesn’t matter who is the liquidator of a company because they are all professional people, with the same duties, but many Directors feel more comfortable knowing that the liquidation is proceeding with somebody that they have spoken to and discussed their concerns with.
A compulsory liquidation can also be a lot more expensive than a CVL because the government takes a percentage of every realisation to help pay for the Insolvency Service. This means there can be less for creditors and, the fact is, a lot of Directors are actually creditors themselves.
Q8. Hang on, my accounts say that I owe the company some money.
If you have what is known in accounting circles as an overdrawn Director’s current account it usually arises as a result of drawing funds in anticipation of dividends, often on the advice of the company’s accountant. Only later does it transpire that, because the company is loss-making, there are insufficient retained reserves to actually declare the dividend.
We’re not going to pull the wool over your eyes. You may have ended up with a serious problem.
An overdrawn Director’s current account is:
- a potential exposure to personal and corporate tax
- repayable by the Director to the company in liquidation
- NOT a reason to not liquidate an insolvent company
If you can’t afford to repay all of the debt then the liquidator will doubtless reach a settlement figure with you, particularly if you don’t have many personal assets. The liquidator can do this because it is a sensible deal which is the best result for creditors in the circumstances.
Q9. I have been told that I can’t be a Director again if I liquidate my company
Well that’s not true either unless, of course, you have been disqualified from acting as a Director following the report on your conduct or made bankrupt as a result of any personal guarantees you have given.
Q10. Can we use the same name again?
There are a lot of sections of insolvency statute dedicated to this topic and setting out what is a prohibited name. The best way of dealing with this is to buy the trading style as in Question 1 above. After this there are a few notifications to deal with but they’re not too stressful.
If you do use a prohibited name the sanctions are tough. Essentially you are committing a criminal offence which renders you liable to fine, imprisonment or both and you can become personally liable for the new company’s debts.
Q11. A guy in the pub told me I can “phoenix”my business. What is that?
The liquidator has a duty to maximise realisations for the benefit of the company’s creditors. This could be, if certain formalities are observed, byway of a disposal ofthe company’s business and assets, including its trading style (name) to a connected party, including the Directors of the company in liquidation.
In order to protect the position of the Director, the liquidator and purchaser the assets being sold would be professionally valued so that everyone can be pretty certain that a fair price is being obtained.
In certain circumstances it may also be advisable to market the business and assets to ensure that there is no better offer available.
Whilst you can acquire a trading style as part of the acquisition, the actual company name should not be the same or similar to the liquidated company.
For example if your liquidated company was called Metro WidgetsLtd, and you traded as “Metro Widgets”, your new company should not be called, for example, Metro Widgets(UK) Limited. You could, however, be Tablechair Limited T/as Metro Widgets once you acquired the trading style.
The price of the trading style would normally reflect that you are receiving the benefit of goodwill within the name and, for example, any advertising that “Metro Widgets” has out there which directs to the Director’s mobile phone!
Generally speaking Directors also like to acquire the web site and domains which arealso valued and realised by the liquidator.
Another point to consider is that by acquiring the former business you may be taking on certain employee liabilities. Employees are protected by a law called Transfer of Undertaking Protection of Employment Regulations(TUPE) and usually move to the new business purchaser who then has to decide whether to keep them or not. Neither www.voluntaryliquidation.london nor the Liquidator can give advice on employment law so we recommend you take your own legal advice before entering into a transaction where existing employees are transferred.
Any sums paid for company assets must be given to the liquidator or proposed liquidator and should not be paid into the company bank account.
Before embarking on a “phoenix,”as this in known,you should also confirm that suppliers will continue to trade with you or that there are alternative suppliers available.
Q12. A bloke in the pub says I should just strike off my company and keep the business and assets…
He doesn’t sound like a trained insolvency professional. It’s very likely that any attempt to dissolve the company through the Companies House process will be met with objections from creditors. As far as “keeping the business” is concerned that is, how can we put this, stealing from the company! You would be defrauding the creditors of the company. If you do get away with this you will spend the next few years looking over your shoulder wondering whether a creditor will restore your company to the register and wind it up. We are sure you can imagine what the liquidator of the restored company is going to think of how you acted! Why don’t you just do the job properly in the first place? Liquidate it and buy the business for value.