Should you pay for your company’s liquidation? Yes – and here’s why
We’ve all seen multiple examples of it on social media especially, people will gleefully share false news and images that a simple check of the BBC or other reputable news site could tell them is not true.
Received wisdom and advice can be harder to disprove than this so we find it annoying when we hear false and wrong advice passed off as something credible.
One example we’re sadly hearing a lot about recently is the idea that companies with debts, including bounce back loans, business rates and VAT arrears, can simply dissolve themselves and these obligations away into thin air.
Usually sensible people have been taken in by this one in particular – we even had a good client ask us “why should I pay for my company’s liquidation? Can’t I get it for free if it’s struck off?”
The liquidator has to investigate the conduct of the directors in the lead up to the liquidation as a mandatory part of the process but if you have done everything in your power to keep the business running and have kept your records in good order then you’ll have nothing to worry about.
Even if, in hindsight, you’re worried about how a couple of your decisions and actions might be viewed, you can explain the circumstances and rationale to the liquidator and if you can provide supporting evidence, they will be quite likely to accept your version of events and say so in their report to HMRC.
The same doesn’t apply for directors who try to strike off or dissolve their company with outstanding debts – whether they be bounce back loans, CBILS, VAT arrears or other tax payments they owe.
The rules about striking off are very strict and explicit – no company with debts can be struck off.
But this doesn’t stop some unscrupulous business owners from trying to dissolve the firm to avoid their obligations – or honest directors that have received some bad advice and been told that this is possible.
There’s a new law making its way through parliament at the moment – the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill – that will give dishonest directors some pause for thought.
Right now director disqualifications can be implemented for clear offences such as falsifying records and taking money out of an insolvency business.
Any attempt to defraud HMRC by deliberately avoiding paying bounce back loan debts for example, would also very likely lead to disqualification.
The HMRC have held their fire considerably during the pandemic and subsequent lockdown periods because of the unique situation a lot of otherwise viable and profitable businesses found themselves in.
Things are changing as more industries begin to trade without restrictions, HMRC and The Insolvency Service will also be moving up the gears to begin recouping some of the historic levels of support paid out.
One way they will do this is by using new powers given to them by the bill that allows retrospective investigations and actions to be taken against directors for the first time if they’re found to have dissolved their company with outstanding debts.
Company strike offs and dissolutions will be examined to see if any were carried out with outstanding debts and if discovered could lead to punishments including fines, disqualifications of up to 15 years and personal financial liability to settle the debts placed on the directors.
Business Secretary Kwasi Kwarteng said: “We need to restore business confidence and people’s confidence in business.
“This is why we won’t hesitate to disqualify directors who deliberately leave employees and taxpayers out of pocket. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”
Chris Horner, Insolvency Director with Businessrescueexpert.co.uk, sets out the likely scenario.
“The new legislation is clearly aimed at those directors who thought they’d be clever and try to dissolve their companies to avoid paying their creditors – including HMRC.
“Directors who’ve done the right thing and liquidated their companies voluntarily through a creditors voluntary liquidation (CVL) or other process don’t have anything to worry about from the bill.
“Dissolution or striking off a company is a cheap and efficient way of closing a dormant or debt free business and thousands of businesses do it every year.
“It’s the small minority of directors who thought it was a great way to dodge their debts that should rightly be dreading a letter, email or increasingly possible from the end of September – a knock at the door.
“An important point to make for businesses that legitimately took out bounce back loans or CBILS borrowing is that they aren’t HMRC’s primary target either.
“ As long as they have kept records and documentation or other evidence that supports their explanations on how the money was used, why they borrowed it, how their business functioned during the pandemic then they can be confident that they can answer any questions fully and convincingly.
There are several other good reasons why you should be happy to liquidate your business voluntarily:
- You can choose your liquidator
You can take advice and pick the insolvency practitioner choice of your choice to oversee the process and guide you through the issues and requirements.
- Personal guarantees and directors loan accounts
If a company goes into liquidation any personal guarantees directors have given on debt will crystallise – becoming payable immediately. A liquidator will help you create a plan to deal with this situation. Similarly, a liquidator has a duty to recover any funds owing from overdrawn directors loan accounts and can advise ahead of time the best course of action to deal with this eventuality.
- Redundancy claims
A liquidator can advise on the redundancy procedure for existing staff and/or the transfer of existing staff to a new business (TUPE).
One often overlooked but important detail is that directors who have been paid via PAYE are also eligible for redundancy payments.
The liquidator can advise the best way forward to access what could be some vital income – especially as it may be possible to use it to finance the liquidation process with the proceeds.
- Essential administrative tasks
There are a lot of things that have to be done correctly in a liquidation and it can be easy to lose track of them, especially if your attention is being pulled in several different directions.
The liquidator will keep you on track of what needs to be done, how and when including the sale of assets, transfer of leases and several other requirements.
Topics such as liquidation and dissolution can be stressful at the best of times but even more so when sanctions such as disqualification and being made personally liable to repay any debts your company was closed down inappropriately or deceitfully.
The vast majority of businesses that have closed down in the past two years have nothing to worry about. They did their duties to the best of their ability and made the difficult but ultimately correct decisions to close their companies down.
Several others might now be in a similar position and are nervous that although the correct decision is to liquidate the business, this wouldn’t be the end of matters for them or the company.
We can reassure them in one conversation.
After a free initial consultation with one of our expert advisors, directors will have a far clearer idea of what options they have to close or restructure their companies, the costs involved and what the likely timescales will be.
Then, for the first time in a while for many, they will finally be able to see an end to their problems and be able to think of new beginnings instead.