An unpicking of whether ‘DIY Company Closure’ still does the business, or is just comic misadventure.
Not before time, The Insolvency Service has finally as good as admitted to Moore News that “The Spongebob Plan” – hatched here on UK Business Forum (UKBF) – stands up to scrutiny.
A timely, overdue clarification from The Insolvency Service…
Based on guidance it handed this week to Moore News, the government agency’s all but admission is desperately needed in the current climate.
Yes, inflation is meant to halve to 2% by April, but the UK is still in a cost-of-living crisis; so still in an environment where a skint, insolvent company director must know that the appointment of an Insolvency Practitioner — if they cannot afford one — is not required by law.
It’s a shame that The Insolvency Service’s own six-part online guidance, “Options when a company is insolvent,” doesn’t make that crystal clear.
The online guidance doesn’t put this key fact that it is permissible to ‘Do It Yourself’ on company closure, without the need for an Insolvency Practitioner (IP), beyond doubt.
‘Legal’
Highlighted by the Insolvency Service to Moore News, in response to whether the ‘no frills’ plan by UKBF user “Spongebob” still holds water; some 11 years later, The Insolvency Service online guidance mentions ‘legal’ six times.
Reassuring, right?!
Unfortunately not, because none of those six mentions of what’s lawful relates to The Spongebob Plan’s central ‘hinge’ — that there is no requirement in law to appoint an IP.
[N.B. For the purposes of this article, The Insolvency Service confirmed to Moore News that the appointment of an Insolvency Practitioner is NOT a statutory requirement when closing a UK limited company.]
Hinge and bracket
But if that’s the ‘hinge’ of The Spongebob Plan,’ then what surely represents its ‘bracket’ (i.e. its second most key principle), which is that there is no legal requirement to place an insolvent company into voluntary liquidation, isn’t unequivocally addressed in The Insolvency Service’s guidance either.
Perhaps this two-fold omission by The Insolvency Service is why some advice by IPs may seem a tad ambiguous.
That is, assuming you’re brave enough to ask what they, as Insolvency Practitioners, make of The Spongebob Plan -- a.k.a the ‘Don’t use an Insolvency Practitioner’ plan!
Skin in the game
But maybe it’s understandable for a reason other than they’ve ‘got skin in the game,’ that IPs are tight-lipped.
If the government’s own body in charge of insolvency isn’t proactively making clear neither the hinge of The Spongebob Plan (no statutory requirement on directors to use an IP), nor its bracket (no statutory requirement to put an insolvent company into voluntary liquidation), then who are industry bods to speak up and say otherwise?
Do the duties of a company director expire?
Yesterday, from Brian Burke, managing director at Quantuma, there was no endorsement of The Spongebob Plan.
Burke told Moore News that when insolvent or at risk of being insolvent, the duties of a director don’t expire because the company’s liabilities exceed its assets or it cannot pay its bills (‘insolvency’); those duties just switch.
“Duties switch to a requirement to take decisions for the benefit of the company’s creditors as a whole,” Mr Burke told Moore News.
“The duty owed to shareholders will be secondary; while the interests of shareholders remain relevant during any period in which the company is, or may be, insolvent, the directors must act in what they consider to be in the best interests of the company’s creditors.”
To some directors, then, putting out a line to creditors that they know or hope won’t be acted on (as per Spongebob’s invite for them to wind-up the company themselves), might smack of duty-dereliction.
Are directors under a legal obligation to personally fund company liquidation?
Insolvency Practitioner Lisa Thomas doesn’t sound like she’ll be advising too many directors to take the punt, even though, refreshingly, she confirmed her services aren’t compulsory if you’re a company wanting to close.
Ms Thomas, an IP at Parker Andrews, told Moore News: “Where a company cannot afford liquidation, directors are under no obligation to personally fund it.
“If they are unwilling or unable to fund, any dissolution is likely their only option -- assuming a creditor doesn’t enforce compulsory liquidation.”
What makes HMRC object to dissolution?
In a generally cautious statement to Moore News, Thomas suggested ‘Spongebob Plan directors’ can likely get to their destination, in exchange for the odd sleepless night.
“HMRC and most banks automatically object to dissolution where there are outstanding tax returns and debts. However, Companies House will eventually strike the company off for non-filing of statutory returns.
“[But] the potential risk for directors is that The Insolvency Service can investigate the company post-dissolution,” Thomas says. “[And it has] powers to disqualify and/or issue compensation notices against the directors personally if there has been wrongdoing.”
Is dissolution considered a last resort?
Daniel Plant, boss of The Liquidation Centre, told Moore News: “Dissolution is the last resort which we find directors only consider if the first two routes are not possible.
“The first route is the director personally paying for a CVL [Creditors’ Voluntary Liquidation]. The second is writing to creditors to invite them to wind up the company through the courts – also known as Compulsory Liquidation.
“But it’s unlikely that a creditor will want to do this, as it will cost them thousands of pounds with little-to-no prospect of a return.”
Do most Insolvency Practitioners offer a free consultation?
Speaking to Moore News, Plant sounded aware that hiS talking about ‘thousands of pounds’ and ‘personally paying’ might be a bit rich for directors in financial distress.
“Most, if not all, IPs will give you a free, initial consultation,” SFP’s boss pointed out. “As they say, ‘knowledge is power’ and you’ll be placed in a far stronger position understanding your options; knowing ways to mitigate risk and identifying any hot-spots of personal exposure.”
A longer version of this article is available at the SME community website UK Business Forums, which commissioned Moore News to investigate ‘DIY Company Closure’ and speak to The Insolvency Service about its legality and viability.