Ceasing to trade after deciding to liquidate

Ceasing to trade after deciding to liquidate

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skwdenyer

Original Poster:

17,799 posts

246 months

Sunday 23rd July 2023
quotequote all
This isn’t my business, but it concerns (genuinely) a friend, who I won’t name or hint at for obvious reasons.

S/he’s decided to liquidate their business. S/he’s proposing to pass the relevant members’ resolution that the business be liquidated. But s/he is proposing to try to keep trading up to the point the liquidators are actually appointed (typically 14-21 days, as I understand it).

For the avoidance of doubt s/he’s not proposing to draw personal money out during that time; s/he thinks this could be good for creditors (more money through the door). But the business is mail order, so some customers would have a right of refund on some sales, and some customers might place orders that are not then fulfilled.

I’ve expressed some doubts as to the legality of that! I’m not an expert on insolvency law. Obviously businesses often trade up to the point of administration, but skipping administration in favour of liquidation seems to me to imply a more definite position about the business.

Ignoring the moral aspects, is this plan likely to cause serious legal trouble for the director/s of this business?

I’ll reiterate, this really isn’t my business! If it were mine, I’d be stopping trading now (or have already done so).

Thanks.

OutInTheShed

8,868 posts

32 months

Sunday 23rd July 2023
quotequote all
I'm no expert, but my understanding is you must not "trade while insolvent".

I think knowingly carrying on with the business knowing you cannot pay your debts is what the experts call 'quite naughty' and can result in the directors having personal responsibility for debts.

Trading while having decided to wind up a solvent company would AIUI be a different matter.

Your friend should google 'trading while insolvent' and get proper advice IMHO.

StevieBee

13,389 posts

261 months

Monday 24th July 2023
quotequote all
From what I recall, the point at which a company is officially deemed insolvent is when the liquidator determines this and writes to the Insolvency Service to confirm the position of the company. It may be permissible to trade up to that point providing doing so does not incur additional debt although most insolvency practitioners would advise the cessation of trade the moment you first speak to them.

Unless your friend sees any possibility of recovery, regardless of the above, they would do well to turn the lights off. From the point at which the Directors consider the company insolvent, they may not take any money or assets from the business for themselves. This may be recovered by the Liquidator if they do. And should the Directors act illegally, there is no protection afforded by the Ltd status of the business so they would be personally liable for penalty or prosecution.


sleepezy

1,901 posts

240 months

Monday 24th July 2023
quotequote all
The first question is whether this would be a solvent or insolvent position.

You state members vote which indicated solvent, but then imply am insolvent position.

The difference is critical. I also think you're mixing directors and members, they may be the same people of course.

The members instigate a members voluntary liquidation (solvent) ; the directors instigate a creditors voluntary liquidation (insolvent but it's then voted on by both members and creditors) ; the creditors instigate a compulsory liquidation (insolvent, in the case of directors not doing anything to instigate an insolvency).

The onset of insolvency is when the directors knew, or should have known, an insolvency was unavoidable, normally on a pay your debts when due test.

Directors can keep trading if doing so it's in the best interests of creditors but cannot worsen the position of any creditor.

Continent liabilities (in this instance customer returns) are not black and white. The clearer concern would be for suppliers who would remain unpaid and customers whose orders remain unfulfilled.

Continuing to trade could lift the corporate veil and leave directors open to personal liability.

Previously you could ameleiorate the risk of unfulfilled orders exposure by putting the payments into a separate account until fulfilled, but this has been challenged so no longer a reliable remedy.

Your friend needs paid for professional advice.

I am typing this while on holiday and in a tent so please forgive any typos or predictive text errors. I've also tried to answer in pain English rather than quote insol text verbatim.

skwdenyer

Original Poster:

17,799 posts

246 months

Monday 24th July 2023
quotequote all
sleepezy said:
The first question is whether this would be a solvent or insolvent position.

You state members vote which indicated solvent, but then imply am insolvent position.

The difference is critical. I also think you're mixing directors and members, they may be the same people of course.

The members instigate a members voluntary liquidation (solvent) ; the directors instigate a creditors voluntary liquidation (insolvent but it's then voted on by both members and creditors) ; the creditors instigate a compulsory liquidation (insolvent, in the case of directors not doing anything to instigate an insolvency).

The onset of insolvency is when the directors knew, or should have known, an insolvency was unavoidable, normally on a pay your debts when due test.

Directors can keep trading if doing so it's in the best interests of creditors but cannot worsen the position of any creditor.

Continent liabilities (in this instance customer returns) are not black and white. The clearer concern would be for suppliers who would remain unpaid and customers whose orders remain unfulfilled.

Continuing to trade could lift the corporate veil and leave directors open to personal liability.

Previously you could ameleiorate the risk of unfulfilled orders exposure by putting the payments into a separate account until fulfilled, but this has been challenged so no longer a reliable remedy.

Your friend needs paid for professional advice.

I am typing this while on holiday and in a tent so please forgive any typos or predictive text errors. I've also tried to answer in pain English rather than quote insol text verbatim.
Thank you to you and those above who've commented.

It is a CVL situation; Directors to instigate, followed by a members' vote.

Agree about professional advice. I've recommended the same. I just wanted to get some informal sanity-checking input in case there were other ways this might play out.

MustangGT

12,048 posts

286 months

Monday 24th July 2023
quotequote all
If the business is still solvent, why they need liquidators? Pay off all the debts, wait until the returns window is over then distribute the remain funds to the shareholders and close the company.

StevieBee

13,389 posts

261 months

Monday 24th July 2023
quotequote all
MustangGT said:
If the business is still solvent, why they need liquidators?
It can sometimes be the least-hassle option for the owners, particularly if there's a complex structure in place or potentially contentious issues between the directors in play.

Bit like Dignitas for businesses!

sleepezy

1,901 posts

240 months

Monday 24th July 2023
quotequote all
MustangGT said:
If the business is still solvent, why they need liquidators? .
Tax efficiency

Edited by sleepezy on Monday 24th July 18:51

Eric Mc

122,699 posts

271 months

Monday 24th July 2023
quotequote all
Businesses cease for all sorts of reasons. Becoming insolvent is not the only reason.

lrdisco

1,523 posts

93 months

Monday 24th July 2023
quotequote all
If all the directors resign then companies house will wind up the business after a short while.
It’s very easy.

Eric Mc

122,699 posts

271 months

Monday 24th July 2023
quotequote all
If Companies House decides to "strike the company off", that does not automatically mean that this is what actually happens.

Once a Striking Off order is made, a Notice is placed in The London Gazette notifying the public that the company is going to be struck off. If anybody has any reasons why they don't want the company struck off (e.g. a creditor, another director, a shareholder) they have three months to apply to block the striking off.

Normally, the organisations that block striking offs are banks/financial institutions and/or HMRC.

jammy-git

29,778 posts

218 months

Monday 31st July 2023
quotequote all
skwdenyer said:
This isn’t my business, but it concerns (genuinely) a friend, who I won’t name or hint at for obvious reasons.

S/he’s decided to liquidate their business. S/he’s proposing to pass the relevant members’ resolution that the business be liquidated. But s/he is proposing to try to keep trading up to the point the liquidators are actually appointed (typically 14-21 days, as I understand it).

For the avoidance of doubt s/he’s not proposing to draw personal money out during that time; s/he thinks this could be good for creditors (more money through the door). But the business is mail order, so some customers would have a right of refund on some sales, and some customers might place orders that are not then fulfilled.

I’ve expressed some doubts as to the legality of that! I’m not an expert on insolvency law. Obviously businesses often trade up to the point of administration, but skipping administration in favour of liquidation seems to me to imply a more definite position about the business.

Ignoring the moral aspects, is this plan likely to cause serious legal trouble for the director/s of this business?

I’ll reiterate, this really isn’t my business! If it were mine, I’d be stopping trading now (or have already done so).

Thanks.
Forgive me if I've missed something, but I don't think you've said whether the business is actually insolvent? Or it is viable but doesn't make sense to continue with the current debts?

skwdenyer

Original Poster:

17,799 posts

246 months

Monday 31st July 2023
quotequote all
jammy-git said:
skwdenyer said:
This isn’t my business, but it concerns (genuinely) a friend, who I won’t name or hint at for obvious reasons.

S/he’s decided to liquidate their business. S/he’s proposing to pass the relevant members’ resolution that the business be liquidated. But s/he is proposing to try to keep trading up to the point the liquidators are actually appointed (typically 14-21 days, as I understand it).

For the avoidance of doubt s/he’s not proposing to draw personal money out during that time; s/he thinks this could be good for creditors (more money through the door). But the business is mail order, so some customers would have a right of refund on some sales, and some customers might place orders that are not then fulfilled.

I’ve expressed some doubts as to the legality of that! I’m not an expert on insolvency law. Obviously businesses often trade up to the point of administration, but skipping administration in favour of liquidation seems to me to imply a more definite position about the business.

Ignoring the moral aspects, is this plan likely to cause serious legal trouble for the director/s of this business?

I’ll reiterate, this really isn’t my business! If it were mine, I’d be stopping trading now (or have already done so).

Thanks.
Forgive me if I've missed something, but I don't think you've said whether the business is actually insolvent? Or it is viable but doesn't make sense to continue with the current debts?
It is insolvent on both the balance sheet test and cashflow test (paying debts as they fall due).

Eric Mc

122,699 posts

271 months

Tuesday 1st August 2023
quotequote all
How is the company managing to pay the debts if it is insolvent?

CCCS

368 posts

233 months

Tuesday 1st August 2023
quotequote all
Lot's of useful articles here https://www.nevilleco.co.uk/useful-articles/

If your friend's accountants have an Insolvency Practitioner they may give some initial advice free of charge. They won't be able to accept an appointment due to conflict of interest but will likely be able to recommend another IP who may also offer initial advice without charge. Use what she learns from the first IP to inform her what to discuss with the second.

Before talking to IPs she needs to educate herself about "preferences" and consider if certain transactions might be said to be preferences, she'll need to think back 2 years and in some instances 5 years.

Initially the IP will be advising your friend in her capacity as a director of the business. The information your friend provides can be investigated later by the IP when their role changes after appointment as liquidator (for example). They will no longer be advising your friend as a director and the relationship will be different. Note, the IP will only be appointed as liquidator after they accept the role, they can turn it down.

If the business doesn't have the money to pay the IP fees the directors will be liable for the fees.

If the directors loan account is overdrawn and the directors can't repay it then HMRC will go after the directors personally for repayment at a later date.

If dividends have been paid she'll be expected to provide meeting minutes and be asked to show what calculations were made at the time dividends were declared to show the business should be paying dividends.

How much are creditors owed £10,000s or £100,000s?




skwdenyer

Original Poster:

17,799 posts

246 months

Tuesday 1st August 2023
quotequote all
CCCS said:
Lot's of useful articles here https://www.nevilleco.co.uk/useful-articles/

If your friend's accountants have an Insolvency Practitioner they may give some initial advice free of charge. They won't be able to accept an appointment due to conflict of interest but will likely be able to recommend another IP who may also offer initial advice without charge. Use what she learns from the first IP to inform her what to discuss with the second.

Before talking to IPs she needs to educate herself about "preferences" and consider if certain transactions might be said to be preferences, she'll need to think back 2 years and in some instances 5 years.

Initially the IP will be advising your friend in her capacity as a director of the business. The information your friend provides can be investigated later by the IP when their role changes after appointment as liquidator (for example). They will no longer be advising your friend as a director and the relationship will be different. Note, the IP will only be appointed as liquidator after they accept the role, they can turn it down.

If the business doesn't have the money to pay the IP fees the directors will be liable for the fees.

If the directors loan account is overdrawn and the directors can't repay it then HMRC will go after the directors personally for repayment at a later date.

If dividends have been paid she'll be expected to provide meeting minutes and be asked to show what calculations were made at the time dividends were declared to show the business should be paying dividends.

How much are creditors owed £10,000s or £100,000s?
Many thanks. £m s.

RM

609 posts

103 months

Tuesday 1st August 2023
quotequote all
CCCS said:
If the business doesn't have the money to pay the IP fees the directors will be liable for the fees.
Where is this legislated? The directors can choose to pay an independent IP, or if the insolvency is forced by a creditor then the Official Receiver may be appointed, but I am not aware of a liability on the directors' part.

sleepezy

1,901 posts

240 months

Tuesday 1st August 2023
quotequote all
RM said:
Where is this legislated?
It isn't. There's an interesting mix of good advice and debatable in the post.

Take advice, absolutely.
Need for directors to pay, no way.
Preference, only really ask whether it's a connected party or not but 2 or 5 years is correct
Conflict of interest, agree
Change of scope of advice changing, not from a quality IP who should always be advising on best interests of creditors at all times and how to ensure they are protected, and by extension directors are protected from wrongful trading
Dividends, God help your friend

I know they get a bad reputation but a quality IP is worth their weight, although I agree they do know how to charge.

The advice to speak to an IP at the accountants though is sound, but your friend will be going down a one way street at that point if they're audited as they won't be getting a clean going concern report from then onwards!

My earlier advice still stands though, from the sound of it your friend needs advice (which provides an element of personal protection itself) asap.

jammy-git

29,778 posts

218 months

Tuesday 1st August 2023
quotequote all
RM said:
CCCS said:
If the business doesn't have the money to pay the IP fees the directors will be liable for the fees.
Where is this legislated? The directors can choose to pay an independent IP, or if the insolvency is forced by a creditor then the Official Receiver may be appointed, but I am not aware of a liability on the directors' part.
I think the point is that, if the company cannot pay the IP, then unless the directors can, the company cannot be put into voluntary liquidation and instead will have to wait until one of the creditors forces liquidation and hope one of the other creditors doesn't object.

CCCS

368 posts

233 months

Wednesday 2nd August 2023
quotequote all
jammy-git said:
RM said:
CCCS said:
If the business doesn't have the money to pay the IP fees the directors will be liable for the fees.
Where is this legislated? The directors can choose to pay an independent IP, or if the insolvency is forced by a creditor then the Official Receiver may be appointed, but I am not aware of a liability on the directors' part.
I think the point is that, if the company cannot pay the IP, then unless the directors can, the company cannot be put into voluntary liquidation and instead will have to wait until one of the creditors forces liquidation and hope one of the other creditors doesn't object.
The OP said it was a Company Voluntary Liquidation, as with all the options, it has pros and cons. The IP will want to be paid, he/she will want an undertaking that if the assets don't cover their fees then the shortfall will be made up by someone, directors or a third party.

With a CVL the company or someone will need to pay.

Jammy sums it up.