Frequently asked questions

Corporate:

How do I pay for the liquidation of my company?

Usually, the expenses and fees of the Liquidator will be met out of the assets that are realised in the liquidation.

But there is another potential source of funding-the Government.

Many directors overlook the fact that the company that they run is in fact their Employer as most directors are also employees.

So when that Employer goes into a formal liquidation process, the director/employee is entitled, like all other employees of the company, to claim for money owed by the Company in liquidation. The claim is effectively made against the Government’s National Insurance Fund which is a state sponsored safety net for employees caught up in a formal insolvency procedure.

An employee is entitled to:

  • Redundancy-based on weekly pay, age and number of years in job-as at 6 April 2018, the maximum amount of redundancy pay is £15,240 per employee and it is tax free
  • Statutory Notice Pay
  • Wages -up to 8 weeks
  • Holiday Pay -up to 6 weeks
  • Pension contributions unpaid

Not so many years ago the claims of directors, who were also shareholders, of the Company were rejected by the Government’s fund, but a number of decisions in the Employment Tribunals have led to the position where Directors claims, in their capacity as Employees, are now treated in the same way that all other employee claims are dealt with. Please refer to the Government’s own Factsheet which you will find here in our Downloads section.

As you can appreciate, the aforementioned claims can soon mount up and quite often, the costs of putting the company into liquidation can be easily met out of the monies that are paid over by the Government.

What do I do with a Winding Up Petition?

A Winding Up Petition is an application to the court, usually by a creditor, seeking an order that a company be placed into compulsory liquidation. The service of the Petition on the company carries with it serious consequences that cannot be ignored.

Immediate action by directors is essential. As soon as the company’s bankers are made aware of the Petition [which in due course will be advertised in the London Gazette], a freeze will be placed on the company’s bank accounts. Directors, in order to safeguard their own position, should not conduct any business for the company without first approaching the court in order to secure a Validation Order, unfreezing the bank account, allowing payments to creditors and enabling the directors to continue to trade the business pending the withdrawal or outcome of the court hearing. The hearing itself  is usually fixed for between 2-3 months from the date of the application itself, so a long hiatus period can ensue, leading to great uncertainty and worry for directors.

Many directors simply believe that paying the petition debt and associated costs will be the end of the matter, but that is far from the case as payment does not automatically result in the petition being dismissed. Other creditors can effectively jump on the back of the petition and make representation to the court seeking to have the winding up order made.

Early professional advice should be sought and representation at any hearings is extremely important in order to avoid grievous harm to the company’s future prospects.

What are “Antecedent Transactions”

These are transactions that take place before some insolvency procedures that might be subject to challenge, usually, but not always by the Office Holder. Preferences and Transactions at Undervalue are the commonest types. If the challenge is upheld, Directors can be ordered by the court to pay monies to the company by way of restitution.

Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.

What are “Time to pay arrangements”

These schemes mainly relate to tax arrears and are agreements with HM Revenue and Customs [HMRC] to repay arrears over a period of time. Such schemes need to be realistic, affordable, and achievable and we at Insolvency-Online can assist you in reaching agreement with HMRC. There is a lot of anecdotal, some would say apocryphal comment, about reaching lengthy payment terms with HMRC, but in our experience, the Revenue departments will only agree to schemes whereby the arrears are settled within 6 months and will never allow you to write off debt other than through a formal CVA or IVA procedure.

In order to put forward a realistic offer, an integrated profit and loss and cash-flow forecast should be prepared that ties in with and reflects the aims of your Business Plan going forward. Insolvency-Online can help you prepare these documents and we will always challenge your assumptions to ensure that your proposal to deal with any arrears is robust and credible.

What is “Turnaround Finance”

If the object of the exercise is to save the business, then in almost all cases, extra cash will be needed to aid the process. Sometimes that additional finance can be generated by accessing the cash tied up in the company’s assets e.g.

– Debtors-Factoring and Invoice Financing
– Plant and Machinery – refinancing through Hire Purchase or Lease – Purchase or Lease Purchase
– Premises – Sale and Leaseback
– Stock – revolving stock financing products

Insolvency-Online is not a finance broker, but we do know finance providers who are prepared to look at difficult funding propositions

What sort of Investigation will a Liquidator carry out into the affairs of an insolvent company

For a detailed review of this aspect of a Liquidator’s duties, please refer to SIP 2 in our Library and Downloads link.

A preliminary review of the company’s books and records will be undertaken in order to identify unusual transactions. A more detailed investigation may follow, but the Liquidator must always bear in mind the level of available assets to fund further investigations and the materiality of matters disclosed.

The Liquidator has a statutory reporting responsibility with regard to the conduct of all directors who had been a director or acted in the capacity of a director within the 3 years leading up to the date of liquidation.

What rights of action does a Liquidator have against third parties, including directors

The simple answer is, an awful lot. The Liquidator has many court backed powers to make third parties deliver up company property but also information and documentation relating to the company.

With the appropriate sanction from creditors, Liquidators can apply to the court seeking orders making directors and other persons personally liable to make contributions to the company as the court thinks fit [Fraudulent Trading/Wrongful Trading] in addition to seek orders regarding Transactions at an Undervalue, unfair Preferences or Misfeasance.

The company is insolvent – what are the directors’ options

Quite often, directors, who have often invested a lot of their own money into a business, tell us that the company has “turned the corner” but is too weighed down by its old liabilities.

The first question that you should ask yourself – “is the business itself viable?” In other words, if you could “park” the historic debt to one side for a moment, could the company operate profitably and generate sufficient cash to pay its ongoing creditors?

If the underlying business of the company is sound but it is technically insolvent either on a cash flow or balance sheet basis, it is often possible to restructure the company in such a way as to protect the core business.

Protection, by way of a legal moratorium against creditor enforcement action, is first achieved by placing the company into a secure environment where the losses of the past are not allowed to drag down the business i.e. by either placing the company into Admin/Pre-pack [a very quick and relatively inexpensive procedure] or seeking creditor and shareholder approval to a CVA. Both options need a well thought out and achievable business plan which eventually will need to put to the company’s creditors for their approval.

Invariably, the plan will provide for payments to historic creditors over several years out of the future profitability of the company, a profitability that would be impossible if the company did not have the ability to “ring fence” the old debts.

The two procedures also lend themselves to situations where a sale of the company’s assets [including goodwill] is the best way forward for the business and the creditors and all the other stakeholders [i.e. bank, employees and customers] as sales of assets on an ongoing basis, free of historic debt, bring better returns to creditors and preserve livelihoods.

If the underlying viability is no longer there, the directors need to take prompt action to preserve the assets of the company [directors are after all custodians of such assets for the benefit of the creditors] and take the most appropriate steps to ensure that the company’s affairs are wound up in a proper manner.

A CVL is usually the best course of action in such circumstances as it relatively quickly ensures that a Licensed Insolvency Practitioner can take control and in his capacity as Liquidator can dispose of assets and account to the creditors and shareholders.

What are the consequences of being a director of a company in liquidation/administration

Well the good news is that there is no legal bar on you continuing to act as a director of another limited company and because of the nature of “limited liability”; you personally do not have to pay back the creditors.

The bad news is that in Liquidation, action could be taken against you for Wrongful Trading which could result in you having to pay money into the Liquidation pot for the benefit of the creditors. Any personal guarantees that you have given will be called and you will have to make arrangements with such guarantee creditors to repay the monies back [and beware, interest will continue to run on such liabilities].

What are my chances of being disqualified as a director

We would not wish to give any impression of trivialising this issue, but in reality the chances of being disqualified are slim. In the Financial Year 2013/14 1,282 individuals were disqualified with 1,209 individuals in 2014/2015 [Liquidation totals in 2013 and 2014 were 11,997 and 14,042 respectively]. The numbers of directors who are disqualified are relatively small given the number of corporate failures; however, quite rightly, disqualification remains a powerful tool against those who abuse the privilege of limited liability.

Directors who have allowed their company to take substantial deposits from customers and have then not provided the goods or services are an obvious target for the Secretary of State. Similarly, anecdotal evidence would suggest that directors involved in their third or fourth corporate failure may well [and some may say justifiably] find themselves in the firing line.

Quite often, rather than seek a prosecution through the court, The Insolvency Service will seek to obtain an undertaking from the director which has the same effect as a disqualification order.

The minimum period of disqualification is 2 years and the maximum 15 years.

A disqualification order or undertaking does not stop you from having a job with a company, but unless you have court permission, it does stop you from:

– being a director of a company;
– acting as receiver of a company’s property;
– being concerned in or taking part in the promotion, formation or management of a company

The order or undertaking does not stop you carrying on business as a sole trader or in partnership with others but, unless you have court permission, you must not be a member of or be concerned or take part in the promotion, formation or management of a Limited Liability Partnership. Contravening the order or undertaking is a criminal offence with a possible jail sentence for up to 2 years and a fine.

What is Wrongful Trading and how do I as a director protect myself

It is a civil liability imposed on directors who allowed their company to continue trading when they knew or ought to have known that there was no prospect of meeting the company liabilities as they fell due. An action for Wrongful Trading can only be commenced by a Liquidator after a company has gone into insolvent liquidation.

A successful Wrongful Trading prosecution can result in a financial order against a director for the payment of monies to the company.

In order to minimise the risk of a prosecution for Wrongful Trading a director should at all times act in good faith towards all parties and where possible take early professional advice.

A director should not:

– Assume that the solvency or otherwise of the company is simply the Finance Director’s responsibility
– Only look at or ask for the company’s accounts at year end
– Ignore the warning signs of creditor “payment chasing” letters, demands and CCJs
– Turn a blind eye and hope that everything will work out ok in the end

A director should:

– Ensure that the company has proper accounting and reporting systems in place
– Minute all major commercial decisions.
– Take professional advice and act upon it

Can I re-use the company name after it has gone into insolvent liquidation

It is automatically a criminal offence to act as a director or be involved in the set up or management, within the next five years, of another company with the same or a similar name, without the court’s permission. There are certain sets of circumstances where the restriction would not apply and we at Insolvency-Online can advise you accordingly.

What is a Pre-pack sale

The term “pre-pack” has arisen to reflect the increasing numbers of sales of businesses on the day or shortly after the date a company is placed into Administration. Effectively, a buyer has been found for the business before formal insolvency proceedings have been commenced and in order to preserve continuity and enhance asset value, the sale is conducted by the Administrator almost immediately after his appointment. Such a sale process contrasts with an open marketing of the assets after the appointment of an Administrator.

Our trade association R3 has defines a pre-pack sale as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or shortly after, his appointment”. These sales are normally done by Administrators although, in theory, such sales can be achieved in liquidation by a Liquidator

The courts have held that an Administrator can sell the company’s assets immediately upon his appointment, without court approval or the approval of the creditors.

Speed and preservation of the continuity of the business are the real advantages to the process. Uncertainties regarding trading operations are removed and invariably the value of the business and jobs are preserved.

The sale process is backed up by independent valuations and sometimes by way of discrete marketing of the business and assets prior to the company being placed into Administration. Given that many pre-pack sales are to connected parties/current directors, we at Insolvency-Online ensure that the process is carried out in such a way as to ensure that no justifiable criticism of the directors or the Administrator can be made.

Personal:

What are “Antecedent Transactions”

These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.

In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.

Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.

What are “Time to pay arrangements”

These schemes mainly relate to tax arrears and are agreements with HM Revenue and Customs [HMRC] to repay arrears over a period of time. Such schemes need to be realistic, affordable, and achievable and we at Insolvency-Online can assist you in reaching agreement with HMRC. There is a lot of anecdotal, some would say apocryphal comment, about reaching lengthy payment terms with HMRC, but in our experience, the Revenue departments will only agree to schemes whereby the arrears are settled within 6 months and will never allow you to write off debt other than through a formal IVA procedure.

What is an IVA

It is a formal insolvency process which allows for an insolvent Individual/Business Partners to come to a legally binding agreement with his/her creditors over the payment of his/her debts. The IVA takes the form of a contract between the Individual and their creditors and gives the Individual breathing space in which to deal with his/her financial difficulties. Most IVAs rely upon monthly contributions of surplus income being paid into the IVA which are then in turn distributed to the creditors in accordance with the specific terms of the IVA Proposal [Business Plan]. An IVA is suitable for Individuals in paid employment or who are self-employed.

An IVA once accepted, stops creditors taking legal action against the Individual for recovery of outstanding debts.

Once the IVA is accepted by the creditors, interest and charges on all unsecured debts will cease.

How long do I remain a Bankrupt

Usually, you will be automatically discharged from bankruptcy exactly 12 months after the date of the Bankruptcy Order.

The Official Receiver can, however, apply to the court for a Bankruptcy Restriction Order or seek to persuade you to enter into a Bankruptcy Restriction Undertaking which will prolong the period of bankruptcy and the restrictions relating to an un-discharged bankrupt.

Can I still run a business whilst I am bankrupt

There is no legal restriction on you continuing to run your own business, but you must do so using your own name or the name and description in which you were made bankrupt [i.e. what is said on the Bankruptcy Order].

As you can imagine there are a number of practical impediments in doing so in addition to the fact that you cannot take over £500 credit without first advising your supplier that you are an un-discharged bankrupt.

As a bankrupt you are disqualified from acting as a director of a limited company without leave of the Court. In addition, certain professions do not allow bankrupts to practice their chosen profession whilst bankrupt [if this may apply, check with your professional body.

What assets can I keep in bankruptcy

You can usually keep:

– items needed for your job – for example, tools, books or a motor vehicle
– household items – for example, clothing, bedding or furniture

However, you may have to give these items up if they cost more than a reasonable replacement.

What happens to my home if I am made bankrupt

If you own your home, your share of the equity in it will be realised for the benefit of your creditors. You have a right to remain in the house for 12 months after your bankruptcy [as long as you continue to make the mortgage payments], but after that time, the rights of creditors will prevail and your Trustee in Bankruptcy can apply to court for a Possession Order requiring you and your family to vacate the property so that he can sell it.

If your share in the equity is below £1,000, the Official Receiver, as Trustee, will usually transfer his interest back to you or a third party [i.e. your wife/husband/partner] for a nominal amount.

What happens to my Pension if I am made bankrupt

All approved pensions [i.e. HMRC tax compliant ones] in cases made on a petition presented on or after 29 May 2000 are excluded from the bankrupt’s estate.

If the pension is due to come into payment within three years of the date of the Bankruptcy Order, the Official Receiver, as Trustee, may seek to enter into an Income Payments Agreement with you for any surplus pension income or require a realisation of any lump sum that you may be entitled to draw down.

If it can be proved that you made excessive payments into a pension scheme prior to your bankruptcy, the Trustee in Bankruptcy could apply to court to have those payments returned and paid into your bankruptcy.

What if I inherit some money whilst I am bankrupt

You have a legal duty to inform the Trustee in Bankruptcy about all windfalls or inheritances that you receive during the period you are an un-discharged bankrupt. The monies will be an asset available for your creditors.

What am I not allowed to do if I am a bankrupt

It is a criminal offence to break any of the following restrictions:

  • – borrow more than £500 without telling the lender you are an un-discharged bankrupt
  • – act as a director of a company without the court’s permission
  • – create, manage or promote a company without the court’s permission
  • – manage a business with a different name without telling people you do business with that you are an un-discharged bankrupt

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