Our guide to "cheap liquidations" and the pros and cons of compulsory winding up compared to voluntary liquidation
We are often asked about the benefits and pitfalls of "cheap" voluntary liquidations that are promoted by our competitors.
We always read our competitors’ promotional literature with interest. Usually it’s very good, as, in the last 30 years, the people taking formal insolvency appointments will have achieved the same qualification as we have to gain our licence. Therefore, what differentiates firms is usually their approach to each new assignment, their ability to communicate clearly and the costs that they will charge.
Unfortunately, poor written communication or the production of material by unqualified sales teams occasionally results in misleading or just plain wrong information for directors.
We believe that every director whose company is insolvent is entitled to the best advice.
Advice that is:
- clear and unequivocal: that actually concludes with a solution, not a list of options;
- independent of all internal and external influences that will benefit the firm giving the advice and not necessarily the client company and its creditors;
- delivered in a timely manner, when needed; and
- at an affordable cost.
One such article, recently[1] issued by a national competitor, addressed the issue of the “cheap” liquidation and warned against unregulated insolvency “experts” and “specialists” who are not licenced to take formal appointments and, therefore, merely pass on the leads they generate for a fee. That we can endorse wholeheartedly.
We at Sadlers do not, will not and never have paid for a referral. The majority of our work comes from recommendations given by those we have helped in the past or by local professionals who know and trust the way we approach each new assignment and respect the knowledge that we bring.
What we were amazed to read was their answer to the question they posed: is there a form of liquidation that can be carried out cheaply whilst ensuring you meet your legal duties as a director and, if so, how much would a cheap liquidation cost?
To be clear, there are two different types of liquidation for insolvent companies: the Compulsory Winding up (“CWU”) through the Court or the Creditors’ Voluntary Liquidation (“CVL”), which is started by the directors and confirmed by the shareholders and creditors. So, in effect, the answer to the cheap liquidation question is a comparison between the two procedures.
The benefits of a CVL
The CVL offers you more control as a director. | The control referred to is only in respect of the timing of the start of the liquidation and the choice of nominated liquidator. Thereafter, a director should not be able to exert any influence over the liquidator. This is the same in any CVL or CWU. |
There’s no need to wait for a creditor to wind up the company. | Absolutely true. The director will sign notices to shareholders and creditors at a time of their choosing. |
It can be a cheap way to liquidate a company. | Well it can. However, if a company has no assets of any value and the director is confident that they are not liable for any insolvency offences then making a contribution to costs to start a CVL will be more than expensive than not paying anything at all in a CWU. |
Unlike dissolution, the company cannot be reinstated to the register at Companies House once it has been closed down. | Oh yes it can! Companies are regularly restored to the register after liquidation where an asset comes to light that was not known about during the liquidation. It has been very common over the past few years to restore companies to receive compensation for the miss-selling of interest hedging products by banks. A company will, however, need a Court Order for the reinstatement. Directors and shareholders can only apply direct to Companies House for a reinstatement if the application is within six years of the dissolution and the company was trading at the time (not in liquidation). |
You can choose your own liquidator (for approval by creditors). | This is true. The initial liquidator in a CWU is always the Official Receiver, a role within the Civil Service of the Government. Whilst it is common for CWUs with assets to be passed out to private practice, the liquidator will be appointed from a rota or chosen by a creditors’ vote. The directors have no influence over who is their company’s liquidator. |
The risk of wrongful trading is minimised. | Wrongful trading is the continuation of trade by the director from the point at which they knew, or should have known, that the company could not avoid going into insolvent liquidation (so CVL or CWU). The personal penalty that can be attached to a director by the Court is the increase in the debts due to creditors over this period. Therefore, if a director decides not to start a CVL but closes the company so that it does not take on additional credit and simply waits for a creditor to issue a petition to Court for a CWU Order, there is no risk of wrongful trading. |
You may be eligible for director redundancy. | There’s no such thing as director redundancy. All employees with two years or more service are entitled to redundancy pay (and pay in lieu of notice, outstanding holiday pay and wages), which is paid by the Government’s Redundancy Payments Office (“RPO”). Directors are classed as employees under certain conditions; primarily when they are on the company’s payroll and subject to PAYE deductions and NICs. If a director meets these criteria then they are entitled to payment by the RPO whether the company is in a CWU or CVL. |
If you can fund (the costs of a CVL personally, as a director) it can help you avoid CWU and a higher risk of personal liability. | Well it will probably avoid the company being wound up by the Court, although even this is not certain. The Court has the discretion to make an order for a CWU whether or not the company is already in CVL. Most petitioners will, however, be satisfied that the company is in liquidation and withdraw their application at Court. There is, however, no greater risk of personal liability in a CWU than a CVL. The risk comes from whether you, as a director, have breached insolvency or company law, knowingly or unwittingly. That risk should be identical in either form of liquidation and to present it as otherwise implies that a CVL liquidator will “go soft” on a director who is guilty of a misdemeanour. |
The average director redundancy claim is £9,000. | We would be very interested to know what statistical sample has been taken to produce this appealing figure. Given that the RPO caps the level of the gross weekly wage that it pays to employees at £525[2], it would require a director to be earning at least £525 per week and be entitled to a multiple of at least 17 to achieve £9,000[3]. |
There may be money left over from a director redundancy claim to pay some of the company’s debt. | The claim against the RPO is the director’s own money. If we accept the illustrative figures of the director receiving £9,000 and giving the insolvency practitioner £4,000 to act as liquidator in the CVL, the surplus £5,000 is the director’s, and does not belong to the company. A liquidation discharges all director liabilities to the company’s creditors unless they have committed an offence that causes a financial penalty or have given separate personal guarantees. |
CWU costs nothing for your business in terms of professional fees but the potential cost to you and fellow directors could be significant, largely due to the level of investigation that CWU triggers. | If the company has some assets then they will be utilised by the Official Receiver to discharge their costs and expenses for carrying out the CWU. It is unlikely though that it will cost the directors anything, unless as explained above. To suggest that the Official Receiver carries out more comprehensive investigations than a liquidator in a CVL is wrong, misleading and in breach of clear best practice guidance set out by the regulators of the insolvency profession. |
Potential ramifications following CWU investigations are:
| All true. However, a liquidator in a CVL is also obliged to report to the Department of Business, Energy and Industrial Strategy any concerns about a director’s conduct. All ramifications should, therefore, be the same in both a CWU or CVL. |
CVL places the interests of creditors first. | As does a CWU. The liquidator acts primarily for the creditors and never the director. |
A CVL is a procedure that can be completed in a controlled, cost effective manner to achieve the best outcome for all stakeholders, including directors and creditors. However, to use misleading language to imply that there are fewer investigations, sanctions are less and that there could be a pot of gold for the director, that wouldn’t ordinarily be available, is simply wrong.
Putting aside any fixed contribution to costs that an insolvency practitioner may require from a company to act as liquidator in a CVL, the only way you can ensure that a liquidation is ultimately cheaper for the benefit of creditors is by comparing the charge out rates of the liquidator and their staff and the speed and efficiency with which the liquidation will be carried out.
We at Sadlers have charge out rates which are between 50% and 18% less than the national and boutique firms who make up our local competition. On straightforward assignments that do not need significant manpower or resources we cannot see how this is justifiable.
If you would like specific guidance for you or your company, talk to Sadlers today. Be assured of getting the best advice.
[1] The article was first issued on the firm’s website on 21 May 2019 and was subsequently heavily promoted on social media.
[2] This usually increases annually, but is £525 per week from 6 April 2019.
[3] To achieve this multiple, a director would need to be entitled to, say, the maximum 8 weeks of unpaid wages, 2 weeks’ accrued holiday pay and have 4 years’ length of service to give 4 weeks’ notice pay and 4 weeks’ redundancy pay.
In our experience many directors of small owner-managed companies are paid on the payroll at a level below the requirement to deduct NICs and PAYE, which is approximately £8,100 per annum. This only equates to £156 per week, gross, and would mean that a multiple of 58 would be needed to achieve a claim of £9,000. Eg 8 weeks of unpaid wages, 4 weeks’ accrued holiday pay and 23 years’ service!
Click for our Guide to "cheap" liquidations to print and keep.