Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
For directors facing the necessity of liquidating their company due to insurmountable debt, the primary concern often revolves around the financial implications of the liquidation process itself, and especially covering the professional fees of the liquidator.
Since professional and personal financial difficulties often go hand in hand, directors are rightfully concerned about the possibility of having to personally fund the liquidation process: the liquidation of a small company costs around £4000 to £6000 + VAT.
I’ll cover your options in detail below.
Options If You Can’t Afford a Liquidator
Option
Description
Sale of Assets
Sell company assets (property, stock, vehicles, intellectual property) to cover insolvency practitioner fees.
Installment Plan with Liquidator
Arrange a payment plan to spread liquidation costs over time. Fees require creditor approval and may be based on time costs or a fixed fee.
Directors’ Redundancy Pay
Directors may qualify for redundancy pay, providing financial relief. Must have worked for the company for at least two years.
Using Personal Funds
Directors may use personal funds to cover liquidation costs if company assets are insufficient. This should be a last resort.
Sale of Assets
It’s important to understand that the sale of company assets, including property, stock, vehicles, and even intellectual property, can often cover the fees for an insolvency practitioner. If the asset sale generates sufficient funds, it can cover all the costs associated with the insolvency process.
The liquidator is responsible for distributing funds to creditors according to a statutory order of priority. After secured creditors with a fixed charge have been paid, the expenses of the insolvent estate, including the liquidator’s fees and disbursements, take precedence over other creditors.
Installment Plan with Liquidator
One viable option is to arrange an instalment plan with a liquidator. This approach involves negotiating a payment plan that spreads the liquidation costs over time.
Insolvency practitioner fees require creditor approval and are usually charged on a time cost or fixed fee basis. However, some IPs may recoup their fee as a percentage of the funds raised from selling certain assets, before distributing the remaining balance to creditors.
By reaching an agreement on a tailored plan, you can make the process financially feasible. This option requires transparent communication with a chosen insolvency practitioner and a clear understanding of the terms of repayment.
You’ll need to have been working for the company for at least two years in a practical role, for at least 16 hours a week and with a salary under PAYE. There must be an implied, oral or written employment contract.
Directors should understand that while redundancy payments can provide financial relief during the period of unemployment following the company’s closure, these funds aren’t meant to be directly allocated towards the costs of the liquidation process itself.
Using Personal Funds for Liquidation
In situations where the company’s assets are inadequate to cover the costs of liquidation, directors might have to consider using personal funds.
Before committing personal money, it’s essential to fully understand the extent of the company’s debts and the likely costs of the liquidation process.
Using personal funds is a last resort and should be undertaken with a clear understanding of the potential consequences for both the director’s personal financial situation and their legal responsibilities.
Should We Just Wait for Compulsory Liquidation to Avoid the Costs?
Waiting for compulsory liquidation to avoid the costs is not advisable. While it may seem like an easy solution to your financial troubles, compulsory liquidation comes with significant drawbacks for directors.
Loss of Control: In a compulsory liquidation, the court appoints a liquidator, meaning you lose the possibility to work with someone of your choice and in your own timeframe.
Worsening Creditors’ Situation: Delaying liquidation can significantly worsen your creditors’ financial situation.
Personal Liability: If it’s discovered that you failed to maximise creditor interests despite knowing there was no reasonable prospect of avoiding liquidation, directors face being held personally liable for company debts.
If you’re struggling with the thought of closing your company because you can’t afford the costs, it’s important to talk to someone who can guide you. At Company Debt, we offer clear advice and support from our experienced team all over the UK. Our first meeting with you is completely free and will help you understand what you can do next to close your business in a way that works for you.
FAQs
How can I determine if my company has sufficient assets to cover the costs of liquidation?
A licensed insolvency practitioner can assess your company’s assets and provide an estimate of the likely costs of liquidation. They will consider the value of assets such as property, equipment, inventory, and accounts receivable, and compare them to the estimated fees and expenses associated with the liquidation process.
What are the risks of continuing to trade when my company is insolvent and I can’t afford liquidation?
Continuing to trade while insolvent can expose directors to personal liability for wrongful trading. If a court determines that the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvency, they may be held liable for any debts incurred during that time.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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