If your business is insolvent and you feel that it’s no longer viable now or in the future, one option available to you is to enter into a voluntary liquidation.
The first step of this process, known as a creditors’ voluntary liquidation or CVL, is the appointment of a licensed insolvency practitioner. They will be responsible for identifying, valuing and selling the company’s assets and distributing the proceeds to the company’s creditors before closing the business down.
This process can be appealing for company directors because it prioritises the interests of the creditors and reduces the risk of allegations of wrongful trading or misconduct against the company directors.
But if you’re cash-strapped already, you’ll want to know how much this is all going to cost, and where is the money coming from.
What are the Costs of Liquidating a Limited Company?
Liquidation costs will vary depending on whether you’re liquidating voluntarily, or being forced into a compulory liquidation process.
Compulsory liquidation costs are covered by the party petitioning for the winding up of your company.
The costs of voluntary liquidation vary depending on the size of the business and the complexity and time it takes to wind up.
For small limited companies with relatively few assets, costs typically range from £4,000-£6,000 plus VAT. That covers the cost of hiring an insolvency practitioner to act as the liquidator, calling the creditors’ meeting and preparing the statement of affairs and section 98 reports.
The liquidator’s duties may include:
- Advising directors of their duties
- Making redundancies and processing employees’ claims
- Settling outstanding disputes and contracts
- Collecting money owed to the company
- Informing the relevant authorities such as HMRC, Companies House and the Insolvency Service
- Investigating transactions in the period leading up to the liquidation
- Valuing and realising the assets
Who Pays the Costs of Liquidation?
One concern you’ll undoubtedly have as the director of an insolvent business is how the liquidation costs will be paid. There are several different ways the cost of voluntary liquidation can be covered:
(1) Through the sale of company assets
One of the liquidator’s main roles is to sell the company’s assets and any work in progress following a valuation by a RICS chartered surveyor. As well as cash in the bank, these assets can include stock, machinery, or even intellectual property.
The costs of the liquidation can usually be met by these sales.
(2) By Directors Personally
If the sale of assets does not cover the cost of liquidation, you may be left with no choice other than to pay using funds held personally. It is not uncommon for directors to use personal savings or pay for the liquidation with a credit card or personal loan. Although that might sound drastic, it’s often worth it to avoid the stress and potential repercussions of a compulsory liquidation.
NB: Liquidation cannot be funded from the company director’s redundancy pay
Not many people know that directors of limited companies may be entitled to redundancy pay, once their company is in liquidation. The average sum paid for director redundancy is around £12,000, which is usually good news for cash-strapped directors.
However, although it has become normal for many firms to suggest you can just use this to pay for liquidation, that’s not the case. There is an obvious conflict of interests for insolvency practitioners to suggest a course of action which would end up paying their own fees. Hence this is forbidden by the Insolvency Service.
If you choose to use us as your liquidators, we will always assess your eligibility for directors redundancy as standard. But this is a seperate subject from how you can pay for any potential liquidation.
My Company Can’t Afford the Costs of Liquidation
If you’re choosing voluntary liquidation, the fees have to come from somewhere and so, where the company has no cash or assets, directors will have to find the money themselves.
If you’re concerned about not being able to find this money, the best course of action is to simply have a no-obligation discussion with us about the situation and we can explain your options.
What if I have an Overdrawn Director’s Loan?
It is a common scenario for directors to have overdrawn directors loans at the point of insolvency. So does this money get written off when the company goes into liquidation, along with the corporate debts?
The answer to this is no. Overdrawn director’s loans are considered a personal debt between you, the director, and the company. As such, you will be asked to repay the money back into the company, as with any other company creditor.
If a director cannot afford to repay what is owed, the liquidator could take legal action through the courts, leaving directors at risk of personal bankruptcy.