If your business has become insolvent or you are worried that you may become insolvent in the future then it’s important that you take insolvency advice but it’s just as important that you understand what type of problems you could cause yourself personally by placing your company into liquidation.
Don’t listen to anyone who says that they can guarantee you that there will be no issues if you place your company into liquidation, there are a number of things that you need to consider and be aware of before making any decisions.
The purpose of this article is not to scare you, in many situations, voluntary liquidation is the best option for your business and gives you and your creditors the very best outcome in what can be a tough time for all involved. The purpose of the article is to educate you on what could go wrong in a liquidation and what problems you may face so you can make better-informed decisions. Hopefully, after reading this you will be able to ask better questions to the insolvency practitioner, this is so important. Many directors end up in a mess after liquidating their company simply because they did not know what questions to ask or what needed to be checked before they placed their company into liquidation.
If you know upfront what problems and challenges might lie ahead for you by placing your company into liquidation then hopefully you won’t make any bad decisions. If there are issues that are going to appear once you go into liquidation then at least understanding them upfront and discussing them in a proactive manner with an insolvency practitioner will result in a better outcome for you.
Problems that you face when you go into liquidation:
Overdrawn Directors Loan Accounts
Once you place your company into liquidation one of the first things that an insolvency practitioner will check is your director’s loan account. They will review your last set of full accounts to see what your latest published position is when it comes to your director’s loan. Then they will review the transactions that have been made between the company and you personally since your last set of accounts were published.
If there is a director’s loan that is overdrawn then you personally owe the company money and the insolvency practitioner’s job is to recover that money from you and then distribute the money to creditors of your company.
Even if your last set of accounts show that you do not have an overdrawn directors loan that may not be the end. You may have recently published your accounts but they were quite probably from the year before. For example, your last set of accounts were published last month and there is no overdrawn directors loan showing, but they were for accounts for the year before. You have nearly 12 months after your last set of accounts where an insolvency practitioner will review the payments that you have made from the business to you personally. They will also look closely at cash withdrawals and expenses. If you have used company funds for your personal benefit then these amounts will be added to your director’s loan account. Please don’t ignore this, the insolvency practitioner will review all your transactions and they will uncover if you have an overdrawn directors loan, if you do have one you need to deal with it head-on from the outset.
Firstly, check with your accountant to see if there was an overdrawn directors loan account in your last set of accounts. Then review all the payments that you have made to yourself personally since that date, you can exclude the salary that has been paid through the PAYE scheme. Make sure you go through this potential problem with your insolvency practitioner BEFORE you appoint them.
If you have an overdrawn directors loan account that you can’t afford to repay in full then you should be able to come to some sort of settlement with the insolvency practitioner depending on your personal financial position. Any overdrawn directors’ loan accounts should be discussed and dealt with in an honest and transparent manner with the insolvency practitioner.
Being accused of wrongful trading
If you are worried about the future of your company you need to be aware of wrongful trading and the consequences of being found guilty of it by an insolvency practitioner. Once you appoint an insolvency practitioner part of their investigation will focus on whether there has been any wrongful trading carried out by the director.
Wrongful trading is when a director continues to trade even though they knew there was no hope of avoiding insolvency and they didn’t take every step possible to minimize the potential loss to creditors. In most cases, they have made the creditor’s positions worse by continuing to trade
Wrongful trading can be a big problem for the directors who are optimists, the ones with the never say die attitude. Although I am a big advocate of positive thinking when it comes to business debt and insolvency, this attitude can leave directors in trouble and being accused of wrongful trading. When your business starts to come into financial difficulty I think you need to see things as they are, not worse than they are, you need to be realistic and it helps when you get advice from someone who is not connected in any way to your business. They can look at your situation with no emotion attached to it and let you know their opinion. You may want to speak to more than one person so you can get other views on your situation.
Here are some examples of wrongful trading:
- Building up large HMRC arrears with no prospect of paying them
- Continuing to trade while insolvent
- Knowingly taking credit from suppliers with no hope of ever repaying them
- Taking deposits from customers with no prospect of carrying out the work or delivering the service/item
- Not keeping up to date with accounts and returns to HMRC
- Repaying your directors loan in preference of all the companies other creditors
If you are found guilty of wrongful trading you could be made personally liable for some or all of the business’s debts and you may also get disqualified as a director. It’s important that if you are worried about wrongful trading that you should take professional insolvency advice early.
As soon as your company becomes insolvent your director’s responsibilities shift and your priority is not to make your creditor’s positions any worse. When your business becomes insolvent we strongly suggest that you keep in contact with your creditors informing them of the situation, make notes of all calls and emails as well.
You can minimize the likelihood of being accused of wrongful trading by seeking insolvency advice as soon as the company becomes insolvent. If you are going to keep trading though make sure that before you do you take a good hard look at the business’s finances. Get a cash flow forecast produced, if you don’t know how to do this ask your accountant. Once you have gone through this exercise you will have a better idea if continuing to trade is a good idea.
Bounce Back Loan Fraud
Over 1.5 million bounce-back loans were given to businesses in the UK while the scheme was open. The loan was ideal for both borrower and lender as the borrower did not need to give a personal guarantee and the government gave the lender a guarantee that if the borrower cannot pay the loan back, the government will pay the bank the money back. Over £46 Billion was lent out to businesses of all sizes across the UK and it’s been estimated that up to 60% of these loans will never be paid back. If your business took a bounce back the loan and can’t pay it back then there is not too much to panic about, if you have applied for the loan in the correct manner and spent it as per terms of the bounce back loan then liquidation will bring an end to your company and the loan will be written off. When applying for a bounce-back loan, you didn’t need to declare that your business would bounce back, but you did need to meet the criteria set out.
You were entitled to apply for a bounce-back loan if your business was based in the UK, was established before March 2020 and you were negatively impacted by Covid-19. The criteria for applying for the bounce back loan was as follows:
- The business is trading in the UK at the date of the application and has been adversely affected by coronavirus
- The business could only apply for one bounce back loan
- The business was established in the UK
- The business was not an ‘undertaking in difficulty on 31st December 2019
- The business was not in insolvency proceedings when it applied
- The business can only use the loan for the economic benefit of the business. You can’t lend it another business, you can’t buy a rental property, you can’t pay for an extension on your house, you can’t buy bitcoin, you can’t trade in forex, you can’t buy a role, etc etc etc
- The business can only apply for between £2,000 and £50,000. You could borrow up to 25% of your companies turnover from the calendar year 2019, that’s from the 1st January to the 31st of January 2019. If you were incorporated after 1st January 2019 you could estimate your companies turnover and borrow up to £50,000.
As the bounce back loan application was self-certification it was open to widespread abuse, within 24 hours of answering a few questions online, some businesses had the money in their account, but many, many directors took advantage of the simplicity of the application process and made fraudulent applications.
The government has come out and given their guidance on what they class to be two types of bounce-back loan fraud, it’s still unclear what the consequences of being found guilty of either are at the moment. Due to the court systems being backed up we have not seen many bounce-back loan fraud cases get to court yet but punishments for these offenses will range from fines, prison terms, director disqualifications, confiscation orders. We also expect to see a large number of civil settlements where the director will have to repay the bounce-back loan money in part or in full.
Soft fraud – This is where a director has exaggerated the companies turnover in order to claim more of a bounce-back loan.
‘Hard’ fraud – Examples of hard fraud include:
- impersonating a director to apply for a bounce-back loan
- fraudulently taking over a company established before the 1 March 2020
- organizing people to apply for bounce-back loans and once the loan is paid out the applicant files for bankruptcy, this is called using a money mule.
- making more than one bounce-back loan application.
Without a doubt, the issue that arises the most when speaking to people is that they thought that they could give a projected turnover when applying for a bounce-back loan. This was only the case if your company had been set up after 1st January 2019, if your company was set up before that date then you could only apply for 25% of 2019’s turnover, capped at £50,000.
If you have applied incorrectly and inflated your turnover to receive a larger bounce back loan than the business was entitled to then be prepared to pay that money back. We have seen a number of cases where the banks are now retrospectively checking bounce-back loan applications and if a director has applied for more than the company was entitled to, the bank is demanding the money back.
Before you decide to appoint an insolvency practitioner make sure that you understand exactly what the repercussions of placing the company into liquidation will be for you personally. Entering into an insolvency procedure is not a decision that you should make on a whim, there are many factors to consider and things that need to be checked. Ultimately if your business has run out of money and has debts that can’t be paid then liquidation is the only real option left.
As soon as you become aware that your business is struggling financially you should seek professional advice. We offer free and independent advice at 1st Business Rescue with no obligation or judgment.