What happens if I cannot afford to liquidate my insolvent company?

Updated: 15th February 2021

Insolvency fees can seem prohibitive when your company is facing liquidation. In many cases, your business will also be your main source of income, and quite often, company financial worries go hand in hand with personal financial problems. But there are ways of paying the fees associated with placing your insolvent company into a voluntary liquidation process which does not require you to use personal funds. 

A Creditors’ Voluntary Liquidation, or CVL, is a preferable option to waiting for a creditor to wind-up your company. Voluntarily placing the business into liquidation demonstrates your understanding and compliance with insolvency rules regarding creditor interests, and protects you from accusations of wrongful trading.

Paying the insolvency practitioner’s costs using company assets

When a company is liquidated, all assets including property, vehicles, stock, as well as any intellectual property, are sold (or 'liquidated') so that as much money as possible can be realised. This money will be used to pay any outstanding creditors as far as possible according to a set heirarchy.

The fees accrued as part of the liquidation process will also make the appointed insolvency practitioner a creditor of the company. Due to this, their fees will be able to be paid using the proceeds from the sale of company assets, meaning directors will not have to use personal funds to cover these professional costs.

Using personal funds to pay liquidation fees

If the company has insufficient assets with which to cover the liquidation fees, you may need to use personal funds to pay the professional costs incurred during the liquidation of your company. In some cases you may be able to negotiate a payment plan with your appointed insolvency practitioner to spread the cost into a series of more easily manageable instalments depending on your situation and personal financial position.

Consider your right to director redundancy

A key consideration during an insolvent liquidation process, is whether or not you’re an employee of the business as well as a director. If you can establish that you’ve fulfilled a role similar to your employees, you may be able to make a claim for redundancy pay from the National Insurance Fund (NIF). This could prove to be something of a lifeline if you are in a precarious financial position during the insolvent liquidation of your company.

The average redundancy claim is currently £9,000 – a substantial sum that is in excess of the costs of an average CVL. To be regarded as an employee, you’ll need to have: 

  • Worked under a written, oral, or implied employment contract for a minimum and continuous period of two years
  • Worked for at least 16 hours per week
  • Fulfilled a practical role within the company, rather than purely advisory
  • Received a salary under PAYE
  • Be owed money by your company – this is often a director’s initial investment

How to liquidate a company yourself

The Creditors’ Voluntary Liquidation process can be initiated yourself online. With the new methods of communication that have now been introduced, this formal insolvency procedure can also be expedited at various other stages.

No longer are in-person meetings the default requirement during this process. This makes a previously administration-heavy procedure faster and easier to negotiate. The Insolvency Rules, 2016, overhauled legislation originally introduced in 1986, and that had been amended 28 times during the intervening years.

You can appoint an insolvency practitioner of your choice to administer the liquidation. If you are eligible for redundancy pay you may be able to pay their fees and even have some money leftover to spend as you see fit.

Compulsory liquidation

Depending on how impatient your creditors are growing, you may have the option of waiting for a creditor to wind up the company through compulsory liquidation. While the petitioning creditor (or creditors) will be responsible for paying the costs associated with this process, it is a risky option to take.

When you known your company to be insolvent, you have a certain number of additional responsibilities as director. One of these is to place the interests of creditors above those of yourself, your company, and any fellow shareholders. By seeking the advice of a licensed insolvency practitioner and voluntarily choosing to liquidate your company, demonstrates your desire to adhere to these duties.

If you ignore these warning signs, however, and the company is liquidated due to the efforts of your creditors, you may find it more difficult to convince the court-appointed insolvency practitioner or official receiver of your adherence to these legal responsibilities. If any incidences of unlawful trading or director misconduct are found during the years leading up to insolvency, you could face disqualification for 2-15 years, financial penalties, and personal liability for the company’s debt.

For more information on voluntary liquidation and claiming redundancy as a director, call our expert team to arrange a free consultation. Begbies Traynor is the UK’s largest professional services consultancy, and with 80 offices nationwide, we can quickly identify your best options.

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