Shutting down a company with creditors

Shutting down a company with creditors

Didn't find your answer?

Hi All,

A client has a couple of companies, both of which have been unsuccessful for various reasons.

Each one has a couple of creditors that it can't afford to pay.
Neither has any assets at all.
The director/shareholder has been making payments on the creditors balances and he can't afford to continue doing so.
He is considering becoming bankrupt (which I realise will have other things to consider).
The companies are not trading, but exist just to decrease "creditors" and increase "directors loan" that he knows he has no chance of ever getting back.

He obviously can't afford to pay off the creditors himself, but equally can't afford to pay for a liquidation.

Does anyone have any advice or guidance about where to go from here, so I can point him in the right direction.

Thanks

David

Replies (35)

Please login or register to join the discussion.

avatar
By Manchester_man
11th Sep 2014 19:49

Yes. It's a limited liability company. It sounds like the company has genuinely tried but has been unsuccessful at regaining liquidity. The company is insolvent in that it cannot pay it's creditors.

Limited liability protection is there for a reason!

What your client needs to do is send a letter from the company to all creditors, explaining that the company is insolvent but doesn't have sufficient funds to pay a liquidator to liquidate the company. The letter should state that there are no assets in the company, that the director himself is also a creditor and invite the creditors to instigate winding up proceedings if they so wish.

Get the client to explain in the letter that, in the event the creditors choose NOT to do this, your client will apply to have the company struck off.

The creditors either will instigate proceedings, or, most probably, they won't. If the former, let it run it's course. There are no assets so unfortunately the creditors will lose out.

If the latter, apply for a striking off shortly afterwards.

Hope this helps.

Thanks (2)
avatar
By User deleted
11th Sep 2014 20:33

Really!
Can it really be that easy?
I thought you had to complete a solvency statement with the petition.
I'll definitely look that up.

How long should you say to the creditors that you will wait before applying to strike off the company?

Thanks (0)
avatar
By Manchester_man
11th Sep 2014 22:37

Yes.

Unless the director has acted as guarantor, in which case the creditors can pursue the director personally.

Otherwise, if the company has no funds or assets, there's nothing to liquidate!

Thanks (0)
avatar
By bernard michael
12th Sep 2014 08:58

Why on earth was the director putting his own money into the company to pay off it's creditors.

My advice is to tell the creditors as described above, resign as a director and let matters take their own course. Either a creditor will wind it up and the Insolvency Service will take over or Cos House will ultimately strike it off

Thanks (0)
Replying to Tax Dragon:
avatar
By User deleted
12th Sep 2014 11:31

Resignation

Can he resign if he is the sole director?

Thanks (0)
Replying to Tax Dragon:
blue sheep
By NH
16th Sep 2014 14:09

there are

bernard michael wrote:

Why on earth was the director putting his own money into the company to pay off it's creditors.

My advice is to tell the creditors as described above, resign as a director and let matters take their own course. Either a creditor will wind it up and the Insolvency Service will take over or Cos House will ultimately strike it off

There are obviously still one or two people out there who wish to honour their commitments, I suspect they are sadly in the minority though

Thanks (0)
Replying to Tax Dragon:
avatar
By bernard michael
16th Sep 2014 14:43

there are

NH wrote:

bernard michael wrote:

Why on earth was the director putting his own money into the company to pay off it's creditors.

My advice is to tell the creditors as described above, resign as a director and let matters take their own course. Either a creditor will wind it up and the Insolvency Service will take over or Cos House will ultimately strike it off

There are obviously still one or two people out there who wish to honour their commitments, I suspect they are sadly in the minority though

But surely that is what limited liability is for. The creditors take a chance on whether they will be paid every time they make a supply. The commitment was the company's not the director's

Thanks (0)
Replying to Wilson Philips:
blue sheep
By NH
16th Sep 2014 14:52

honesty, pride, self respect

bernard michael wrote:

NH wrote:

bernard michael wrote:

Why on earth was the director putting his own money into the company to pay off it's creditors.

My advice is to tell the creditors as described above, resign as a director and let matters take their own course. Either a creditor will wind it up and the Insolvency Service will take over or Cos House will ultimately strike it off

There are obviously still one or two people out there who wish to honour their commitments, I suspect they are sadly in the minority though

But surely that is what limited liability is for. The creditors take a chance on whether they will be paid every time they make a supply. The commitment was the company's not the director's

I know you are right and every situation is different but I know people who think that if they buy goods or services that those goods or services should also be paid for, let your yes mean yes etc....yes really there are some people who still feel that way, honest  :) 

Thanks (0)
avatar
By bernard michael
12th Sep 2014 11:40

Yes- nobody can be forced to be a director.The fact that the company has no officers will speed up Cos House striking it off. Also he then cannot sign a/cs or annual returns, which also a cannot be filed. The registered office will still get correspondence from Cos house - to be ignored

Thanks (0)
avatar
By merlyn
12th Sep 2014 12:25

AKA Spongebob Plan
This topic is quite often discussed on the sister site of this called UKBF.

http://www.ukbusinessforums.co.uk/threads/closing-a-limited-company-wth-...

Thanks (0)
Replying to Red Leader:
avatar
By merlyn
17th Sep 2014 17:06

Shocked

jtready wrote:
I was able to tell him that he was forty grand better off and that he owed me a pint! Best of all, as far as I can tell he hadn’t actually broken any law." I'm no lawyer but I thought that was fraud.

It shocked me when I first heard of it but unless someone actually spends time and resources bothering to investigate the company then any debt is struck off with it.

So technically you could trade for 21 months, not file any accounts and then use this route to keep every penny collected and as HMRC will never know you owed them anything are unlikely to block the strike off as after all lots of companies are setup and never actually used......crazy!

Thanks (1)
avatar
By Ian Lawrence
16th Sep 2014 12:53

Be careful to point out in the letter (if you are sending it) that you are not an insolvency practitioner and are not trying to act as such.  That needs to be very clear.  I have a problem where a creditor accused me of behaving like I knew what to do in an insolvency without the proper qualifications.  He was angry of course because he wasn't going to get paid.  He claims not to have received my letters (two of them) but the address I sent them to was correct. I gave the creditors 2 weeks (but allowed 3 or 4).

Thanks (0)
Replying to pauld:
avatar
By neileg
16th Sep 2014 14:46

Eh?

Ian Lawrence wrote:
Be careful to point out in the letter (if you are sending it) that you are not an insolvency practitioner and are not trying to act as such.  That needs to be very clear.  I have a problem where a creditor accused me of behaving like I knew what to do in an insolvency without the proper qualifications.  He was angry of course because he wasn't going to get paid.  He claims not to have received my letters (two of them) but the address I sent them to was correct. I gave the creditors 2 weeks (but allowed 3 or 4).

Why on earth would an accountant be writing to an insolvent company's creditors? In this case either the director does it or nobody does it.

Talk about looking for trouble...

Thanks (1)
avatar
By User deleted
16th Sep 2014 20:04

Thank you all.
I seem to have stimulated a debate if nothing else!

I will point him in that direction, but definitely take the point that I will not be writing the letter, or advising on detail in the letter, because it is a dangerous area to get into.

Thanks (0)
avatar
By User deleted
16th Sep 2014 20:06

3 months no trading
One extra thing.

The strike off process says that the company must not have traded at all for at least 3 months, but I assume this is the case for a solvent company.

What if the company is insolvent, is there anything that says it can be done straight away, or does it have to wait for three months?

Thanks (0)
avatar
By Ahmed Afraz
17th Sep 2014 10:33

Scenario put forward by you

Fine

Thanks (0)
Replying to rekahiy:
avatar
By User deleted
17th Sep 2014 17:24

Which part is fine?
Is it that he can shut down immediately if the company is insolvent,
Or
Does he still have to wait for 3 months without trading?

Thanks (0)
Replying to lionofludesch:
avatar
By merlyn
17th Sep 2014 17:31

HMRC

enoryt010 wrote:
Is it that he can shut down immediately if the company is insolvent, Or Does he still have to wait for 3 months without trading?

The HMRC website states that you should wait 3 months, but there are no details regarding what happens if you don't.

As you are supposed to stop trading if the company is insolvent then guessing you can do it straight away, I know a lot of the companies who have used this route haven't waited and not heard of any penalty being applied to the directors.

Thanks (0)
Replying to gainsborough:
avatar
By andy.partridge
17th Sep 2014 17:55

A matter of trust

merlyn wrote:

I know a lot of the companies who have used this route haven't waited and not heard of any penalty being applied to the directors.

There will always be companies that make up their VAT figures, make up their profit figures, fail to disclose employees and not pay PAYE etc. Some will get away with it, some will not. What is clear is that as professionals the system is relying on us to advise on the correct course of action and not ('nudge-nudge, wink-wink') recommend that a client take the proverbial punt.

Thanks (1)
avatar
By User deleted
17th Sep 2014 17:41

Thank you

Thanks (0)
avatar
By Justin Bryant
18th Sep 2014 19:03

I have never understood
How the SpongeBob plan works as a tax evasion scheme compared to just using your own bank account and not declaring income as there is essentially no difference and the corporate veil would be pierced etc. I expect that's the main reason people get away with it, which is more or less the same reason why people get away with not declaring cash in hand income etc.

I agree that the SpongeBob plan works fine for genuine insolvency cases (as that is the whole point of limited liability of course).

Thanks (0)
avatar
By cparker87
18th Sep 2014 19:36

A spade is a spade.
Let's call this 'plan' what it is. It's a fraud. The SpongeBob fraud.

I hope I never hear the word SpongeBob come out of my mouth in front of a client.

Thanks (0)
Replying to Glennzy:
Stepurhan
By stepurhan
19th Sep 2014 11:24

Clarify please

cparker87 wrote:
Let's call this 'plan' what it is. It's a fraud. The SpongeBob fraud.
Since you insist on continuing to use that word, please can you clarify something for me. Fraud requires deception. Whilst the Spongebob plan may be unethical, I cannot see any actual deception involved in it. If you think otherwise, please can you point out the part that you think does that.
Thanks (0)
Replying to atleastisoundknowledgable...:
avatar
By jtready
19th Sep 2014 23:06

Overdrawn DLA and Spongebob Plan = FRAUD

stepurhan wrote:

cparker87 wrote:
Let's call this 'plan' what it is. It's a fraud. The SpongeBob fraud.
Since you insist on continuing to use that word, please can you clarify something for me. Fraud requires deception. Whilst the Spongebob plan may be unethical, I cannot see any actual deception involved in it. If you think otherwise, please can you point out the part that you think does that.

I don't have a problem with the plan itself for an insolvent company with no assets available to pay for a formal liquidation. My issue is with the "plan" saying that a director with an overdrawn DLA can follow the "plan" without breaking any law. This is clearly wrong and SIFT Media shouldn't be advocating this approach by pinning the Sponegbob plan as the top post in the UKBF Insolvency Forums.

Thanks (1)
Replying to WhichTyler:
Stepurhan
By stepurhan
22nd Sep 2014 11:18

Not feeling clarified

jtready wrote:
My issue is with the "plan" saying that a director with an overdrawn DLA can follow the "plan" without breaking any law.
Precisely what law are you saying has been broken? The letter to creditors does not say that there is not an overdrawn DLA, simply there are insufficient realisable assets. It also says there are no FUNDS (not assets as you have said) to pay for a formal liquidation. An overdrawn DLA is not funds, so that is true. If the DLA was large enough to cover all creditors that might be an issue. However, if the director has no funds themselves, then the DLA would not be a realisable asset any more than any other debtor who cannot afford to pay.

Yes, it is almost certainly unethical to take out a load of funds personally and then wind up the company. But I am still not seeing outright deception or breach of any other law. I am not seeing it as "clearly wrong" as you assert. If you are confident you are correct, please say precisely what you think is deceptive or what other law you think is breached. Simply repeating your assertion it is fraud without doing that isn't getting us anywhere.

cparker87 wrote:
Perhaps I am more cynical than others who may genuinely believe that most users of this plan are Companies legitimately insolvent and not simply evading tax. However, I firmly believe for the most part it is the latter. As many have alluded to, the 'plan' could be (and probably for the most part is) used to trade for 19 months and then escape with the loot. That would be knowingly evading tax. Is that not deception?
Only if HMRC are told the company is dormant or otherwise given the impression that there is no tax due. HMRC automatically assume active from day 1, so they are expecting a tax liability. Also, the Spongebob plan does not exclude writing to HMRC as a creditor. You are assuming additional steps (which would be deceptive and hence fraud) that are not in the plan as given.

Your unsubstantiated "belief" is not evidence.

Thanks (1)
Replying to atleastisoundknowledgable...:
avatar
By cparker87
20th Sep 2014 00:25

Cynical

stepurhan wrote:

cparker87 wrote:
Let's call this 'plan' what it is. It's a fraud. The SpongeBob fraud.
Since you insist on continuing to use that word, please can you clarify something for me. Fraud requires deception. Whilst the Spongebob plan may be unethical, I cannot see any actual deception involved in it. If you think otherwise, please can you point out the part that you think does that.

Perhaps I am more cynical than others who may genuinely believe that most users of this plan are Companies legitimately insolvent and not simply evading tax. However, I firmly believe for the most part it is the latter.

As many have alluded to, the 'plan' could be (and probably for the most part is) used to trade for 19 months and then escape with the loot. That would be knowingly evading tax. Is that not deception?

Thanks (1)
avatar
By merlyn
18th Sep 2014 19:48

Other options?

Playing devils advocate.

 

So a limited company has run out of funds, it can't afford to pay for an accountants time to prepare final accounts and can't afford to pay for an IP to liquidate the company.

Is there any other option available other than following the spongebob plan?

Thanks (0)
Replying to puzzel:
avatar
By cparker87
18th Sep 2014 19:55

.

merlyn wrote:

Playing devils advocate.

 

So a limited company has run out of funds, it can't afford to pay for an accountants time to prepare final accounts and can't afford to pay for an IP to liquidate the company.

Is there any other option available other than following the spongebob plan?

Please define plan. To me this is a rationally considered route to be taken by someone to achieve a goal. Is the goal of this plan to commit fraud? If so, my point stands.

I suppose conveniently in this plan any residual cash or asset just happen to end up with the director shareholder for them to start anew?

Thanks (0)
Replying to 2003bluecat:
avatar
By merlyn
19th Sep 2014 08:59

Options

cparker87 wrote:
merlyn wrote:

Playing devils advocate.

 

So a limited company has run out of funds, it can't afford to pay for an accountants time to prepare final accounts and can't afford to pay for an IP to liquidate the company.

Is there any other option available other than following the spongebob plan?

Please define plan. To me this is a rationally considered route to be taken by someone to achieve a goal. Is the goal of this plan to commit fraud? If so, my point stands. I suppose conveniently in this plan any residual cash or asset just happen to end up with the director shareholder for them to start anew?

Ok i'll rephrase.

Assuming the directors of the company did not intend for this to happen and like a lot of small business owners didn't keep a proper check on their cashflow and simply ran out of money.

What other options do they have?

And have to stress it's not my plan nor do I agree with it's use, but in some situations seems like the only viable route.

Thanks (0)
avatar
By bernard michael
19th Sep 2014 11:08

What's wrong with my suggestion of the Director resigning and then doing nothing else with it. Cos house will then ultimately strike it off. Mission accomplished and no "fraud" involved

Thanks (0)
avatar
By Justin Bryant
19th Sep 2014 13:03

Stepurhan is clearly 100% correct here
And I would just agree to disagree with cparker87 on this.

Thanks (0)
avatar
By Justin Bryant
22nd Sep 2014 11:01

Yes, I agree

But if you read my post above you will see that that is a rather pointless thing to do if you are a fraudster and you may as well use your own personal bank account and save yourself the fees and hassle of setting up the company and its bank account in the first place! (In fact, I think you are more likely to be caught doing the SBP than simply using your own personal bank account.) 

Thanks (0)
Ronthetax
By ronlfoot
24th Sep 2014 05:54

The SBP

"Oh, what a tangled web we weave when first we practise to deceive".

In my opinion it is far too cheap and easy without any recourse to set up a limited liability company in the UK and then indulge in such shenanigans as the SBP.

 

 

Thanks (0)
By Democratus
24th Sep 2014 09:39

Fraud or not

Does the SpongeBob plan in reality have two effects if we take the scenario set out by jtready?

The company, by dissolving has most likely taken the correct decision as it is insolvent. However the director should be declaring his DLA on the SAR, and it's the failure  to do this which may be fraudulent.

Thanks (2)
avatar
By neileg
24th Sep 2014 11:26

Mmm...

Clearly some impassioned views here.

The limited liability company exists to limit the liability of its shareholders to meet the liabilities of the company in the event that it becomes insolvent.

Exactly the same principle operates in the insolvency of Phones4U as it does in the owner managed small company that might use the Sponge Bob Plan. It is surely the intentions of the directors that make this fraud or unethical or hard luck or just plain incompetence? The manner in which the company is dissolved is not relevant to these motivations. If the law was changed to disable the SBP, this would impact on the innocent insolvencies as well as those invented by fraud. The fraudulent will still operate, though they may find different ways of achieving this.

The UK government tried to reduce gun crime by banning legally held handguns. Anyone notice a significant drop in gun crime? Outlawing the SBP is likely to have the same effect on fraud. 

Thanks (0)