In this article you’ll learn about:
- How a company pays for its own Liquidation
- What happens when a company cannot afford to pay to be liquidated
- Who besides the Directors might pay
- What is actually being paid for
- How much it could cost
Overview Of Who Pays For A Liquidation
Who pays for a Liquidation should be a simple matter but it might not be.
It is however a crucial consideration for many companies (and their Directors) at the moment who are struggling to repay their Bounce Back Loans. Many may need to be wound up.
Aside from how a Liquidation is paid for there is also the separate question of what is actually being paid for when money is provided to a Liquidator.
A company paying to liquidate itself should be the norm. However, this is not necessarily possible. When a company is solvent then the company can pay for what is known as a Members Voluntary Liquidation.
If a company has few or no assets it will be unable to afford to pay for the Liquidation referred to as a Creditors Voluntary Liquidation. This is not at all uncommon because an insolvent company by definition is one that is unable to pay its debts when they fall due or alternatively will be unable to do so even if in the short term it has sufficient cash to trade on.
When a company is insolvent it is not unheard of for Directors to scramble around attempting to carry on trading notwithstanding the potential risks to themselves of personal liability arising from Wrongful Trading due to Section 214 of the Insolvency Act 1986 if they make the situation overall worse for the creditors. This may involve them selling assets to generate further cash. However, this can lead to the company having insufficient assets to wind itself up.
So how else might a company be able to pay for its own Liquidation?
Directors Can Pay For The Liquidation
Well, the Director(s) in light of their duty to the company, to act in its best interests may decide the right and proper thing to do is to put their hands in their own pocket and bail out the company by paying for the Liquidation. In fact, this is a very common means for a company to pay for a Liquidator.
A Director can claim this money as a creditor provided they do not owe more to the company. However, this is likely to be an academic claim as a company without any assets will not be able to pay a dividend to any creditors.
Creditors Can Pay For The Liquidation
If neither the company nor its Directors can afford to pay for a Liquidation, or in the case of Directors, do not want to personally pay for the Liquidation then creditors may end up having to pay.
If creditors want to wind up a company that owes them money and have its affairs investigated they can issue a Winding Up Petition and have the company placed into Compulsory Liquidation through an order of the Court.
It is quite common once a creditor issues a Winding Up Petition for the Directors to then with some urgency take steps to find a Liquidator to deal with the winding up. If necessary they will pay that person from their own resources if the company is without funds.
What Is Being Paid For In A Liquidation?
A company going into Liquidation is a process. It does not happen overnight.
Pre-Appointment Liquidation Period
Sufficient notice needs to be given to creditors so they are aware of the situation and can look to influence (by voting) on the appointment of who the Liquidator might be. A report on the company’s financial position also needs to be provided to them.
The process of placing a company into Liquidation also involves following various statutory procedures and consulting its shareholders to formally approve the Liquidation process. To ensure proper compliance with these procedures documents need to be prepared and assembled.
As a result, the pre-Liquidation phase, sometimes known as the pre-appointment period will involve costs that need to be paid.
Post-Appointment Liquidation Period
Once a Liquidator has been appointed by creditors then the Liquidation formally develops and that is known as the post-appointment phase. This is in fact the Liquidation itself. It is a period in which the Liquidator in compliance with procedures laid down in legislation conducts an orderly winding up of the company so that its life as a legal entity can be concluded.
The post-appointment period also needs to be paid for. However, when a company has few or no assets the post-appointment phase does not necessarily have to be all that time consuming. In such an instance once statutory compliance procedures have been completed the Liquidator may be able to close the case down reasonably quickly.
How Much Could The Directors Be Asked To Pay For A Liquidation?
It is not uncommon for a Liquidator of a company with few or no assets to ask the Directors to pay the sum of £4,000 to £5,000 as an overall fee for both the pre-appointment and post-appointment phases.
It is also not unusual for this to be required upfront in full before the Insolvency Practitioner starts doing any work at all because once the Liquidation starts the Liquidator cannot stop working on the case due to unpaid fees.
