An unpicking of whether ‘DIY Company Closure’ still does the business, or is just comic misadventure, featuring rescue experts and The Insolvency Service.
Not before time, The Insolvency Service has finally as good as admitted that The Spongebob Plan – hatched here on UK Business Forum (UKBF) – stands up to scrutiny.
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 guidance, “Options when a company is insolvent” doesn’t make that crystal clear.
It doesn’t put this key fact beyond doubt.
‘Legal’
Highlighted by the Insolvency Service to Moore News, in response to whether a plan by UKBF user Spongebob still holds water; some 11 years later, The Insolvency Service guidance mentions ‘legal’ six times.
Reassuring, right?
Unfortunately no, because none of those six mentions as to what’s lawfully required (and crucially what’s not), say whether The Spongebob Plan’s central ‘hinge’ — that there is no requirement in law to appoint an IP — is correct.
Hinge and bracket
And if that’s the ‘hinge,’ what surely represents The Spongebob Plan’s ‘bracket’ (i.e. its second most key principle), namely that there is no legal requirement to place an insolvent company into voluntary liquidation, also isn’t unequivocally stated by The Insolvency Service’s guidance.
Perhaps this two-fold omission by The Insolvency Service is why some advice by IPs, including the advice of some IPs quizzed for this Moore News article, may seem a tad ambiguous.
That is; assuming you’re brave enough to ask what they, as Insolvency Practitioners, make of The Spongebob Plan -- aka 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 is making neither the hinge of The Spongebob Plan clear (no statutory requirement on directors to use an IP), nor The Spongebob Plan’s bracket clear (no statutory requirement to put an insolvent company into voluntary liquidation), who are industry bods to speak up and say otherwise?
Yesterday from Brian Burke, managing director at Quantuma, there was no endorsement of The Spongebob Plan.
Burke says 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, might smack of duty-dereliction.
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.”
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 once they arrive.
“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.”
Daniel Plant, boss 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.”
Speaking to Moore News, Plant sounded aware that him 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 SME website UK Business Forums, which commissioned Moore News to investigate ‘DIY Company Closure’ and speak to The Insolvency Service about its legality and viability.