When directors are facing the distress of placing their company into an insolvency procedure it seems ludicrous to then insist upon payment for the service. Cash flow is difficult, business assets are no longer at your disposal, and the interests of creditors is paramount. But there is a method of voluntarily liquidating an insolvent company, essentially for free, if you meet the qualifying conditions.

Creditors’ Voluntary Liquidation (“CVL”)

A voluntary liquidation is a preferable option to waiting for a creditor to wind-up your company.  This option will demonstrate your understanding and compliance with insolvency rules regarding creditor interests, and mitigates accusations of wrongful trading. However, there is usually a fee involved in proceeding with this option.

Insolvency practitioner’s costs

When considering how to pay the insolvency practitioner’s fee, it would be useful to consider whether or not you’re an employee of the business as well as a director.  This is because if as a director you fulfilled a role similar to your employees, you may be able to make a claim for redundancy pay from the National Insurance Fund. 

The average redundancy claim is currently £9,000 – a substantial sum that should pay the costs of a CVL. To be considered as an employee, you will be required to have: 

  • Worked under a written, oral, or implied employment contract for a minimum and continuous period of two years
  • Worked for at least 16 hours per week
  • Fulfilled a practical role within the company, rather than purely advisory
  • Received a salary under PAYE
  • Be owed money by your company – this is often a director’s initial investment

For a small company with minimal assets and few creditors the costs of voluntary liquidation are generally £5,000-£6,000, although these fees will rise for companies with a larger asset base or a larger number of creditors. 

If you feel that you cannot afford to pay the insolvency practitioner’s fees, claiming redundancy may offer a lifeline for you and fellow directors.   

The alternative to a CVL is to wait for a creditor to wind up the company however, this alternative is not without significant drawbacks. If any incidences of unlawful trading or director misconduct are found during the years leading up to insolvency, you could face disqualification for up to 15 years, financial penalties, and personal liability for the company’s debt.

If you find yourself in this situation; don’t give up. Seek advice; call us for a free confidential consultation without any obligation.

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