When a company is insolvent and cannot afford liquidation costs, it creates a challenging situation for directors.

This article offers practical advice on your options.

What Happens if I Can't Afford to Liquidate my Insolvent Company?

If You’re Unable to afford an Insolvency Practitioner

When a company faces insolvency, one of the initial steps is to engage an insolvency practitioner to oversee the liquidation process. However, the cost of these services can be a significant concern, especially when company funds are limited. It’s important to understand that the fees for an insolvency practitioner can often be covered by the sale of company assets.

These assets include property, stock, vehicles, and even intellectual property. The sale of these assets is intended to generate funds, part of which can be allocated to pay the practitioner’s fees. In scenarios where company assets are insufficient to cover these costs, directors might need to consider other funding options. These could include personal contributions or negotiating a payment plan with the insolvency practitioner, allowing for a more manageable financial arrangement.

It’s crucial for directors to carefully assess the company’s asset base and explore all possible avenues for financing these fees, ensuring compliance with legal obligations and minimising personal financial impact.

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. This decision should be approached with caution, as it involves significant personal financial risk.

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. Directors should also consider the legal implications of this action, ensuring that they remain compliant with insolvency laws and regulations.

If personal funds are the only option, directors may negotiate a payment plan with the insolvency practitioner. This arrangement can help spread the cost over time, making it more manageable.

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.

Redundancy Pay for Company Directors

Directors of insolvent companies may be eligible for redundancy pay, a consideration that can provide crucial financial support during the liquidation process. To qualify for redundancy, directors must meet certain criteria, such as having worked under a contract of employment and fulfilling a role beyond just an advisory capacity.

Establishing your status as an employee, in addition to being a director, is key to accessing redundancy payments. This involves demonstrating that you’ve worked for at least 16 hours per week under a contract (written, oral, or implied) and have been part of the company for a minimum of two years. Additionally, you should have received a salary under the PAYE system and actively contributed to the company’s operations.

Can I Liquidate an Insolvent Company Without a Licensed Insolvency Practitioner?

It’s important to clarify that in the UK, directors cannot legally liquidate their own companies without the involvement of a licensed insolvency practitioner. This legal requirement ensures that the liquidation process is conducted impartially and in accordance with the law, protecting the interests of creditors, employees, and other stakeholders.

The role of the insolvency practitioner is crucial. They are responsible for overseeing the entire process, including the valuation and sale of company assets, settling debts with creditors, and ensuring legal compliance throughout. This professional involvement provides a structured and fair approach to liquidation, which is particularly important in cases of insolvency.

Do You Still Have to Pay When Creditors Force Your Company to Close?

In most cases, you will not have to pay when creditors force your company to close through compulsory liquidation. This is because the limited liability structure of a company typically protects the personal assets of directors from the company’s debts. However, there are a few exceptions to this rule, and directors may be held personally liable for company debts in certain circumstances.

Here are some of the reasons why you may still have to pay, even if your company is forced to close:

  • Wrongful or fraudulent trading: If it is discovered that you have engaged in wrongful or fraudulent trading, you may be held personally liable for the company’s debts. This means that you could be forced to pay these debts out of your own pocket.
  • Breach of fiduciary duty: Directors have a fiduciary duty to act in the best interests of their company. If you are found to have breached this duty, you may be held personally liable for any losses that the company has suffered.
  • Failure to keep proper records: As a director, you have a legal obligation to keep proper records of the company’s finances. If you fail to do so, you may be held personally liable for any losses that the company has suffered.
  • Overdrawn director’s loan account (ODLA): If you have an ODLA and the company becomes insolvent, you will be required to repay the outstanding balance of your loan. This is because an ODLA is treated as a debt owed to the company by you, rather than as an asset of the company.

Liquidation Options without a Licensed Practitioner

When a company is insolvent and cannot afford the fees for a licensed insolvency practitioner, the options are unfortunately quite limited, particularly if there are outstanding debts. Here’s a realistic view of the situation:

Awaiting Compulsory Liquidation: If a company has debts it cannot pay, and can’t afford voluntary liquidation costs, it may have no choice but to wait for creditors to initiate compulsory liquidation. This process is forced by creditors through a winding-up petition and leads to the company being legally closed down. It’s important to note that in compulsory liquidation, the control of the process is out of the directors’ hands, and the outcomes can be less favourable.

Seeking Professional Advice: Even in these constrained circumstances, it’s crucial to consult with insolvency experts or legal advisors. They can offer valuable insights into your rights and responsibilities as a director during this challenging period and help you understand the implications of compulsory liquidation.

Direct Creditor Negotiation: While not always possible, directors can attempt to negotiate with creditors directly. This might involve proposing payment plans or asking for more time to find a solution. However, success in these negotiations largely depends on the creditors’ willingness to cooperate and the company’s overall financial situation.