If a company struggles to keep on trading due to becoming insolvent the standard procedure for shutting it down is for the directors to appoint an Insolvency Practitioner to liquidate it. The IP will appreciate the value of the company’s assets and after deducting his fee distribute the proceeds amongst the company’s creditors. This procedure is effective enough if there are sufficient possessions within the business to cover the IP’s fee.

VAT. It’s very common for unscrupulous IPs to inform directors of such companies seeking their advice that they have no alternative but to appoint a liquidator and that is a legal requirement. This is exactly the situation I came across myself in some years ago. I had developed two companies trading out of the same premises in similar lines of business and both were in serious trouble.

I consulted several Insolvency Practitioners for advice, and received absolutely nothing but needs for almost £10,000 and the promise to make away all my problems go. I was told that the only path to close my companies and to stick to the right side of the law was to appoint an IP.

The problem was that I barely had £10, mind 10 grand never! After some research however, I realized which I have been lied to. There is absolutely no legal requirement to put an insolvent company into voluntary liquidation, no legal necessity to appoint an IP certainly. Effectively all that is required in law is a company finding itself to be insolvent must cease to trade, and that all creditors must then be treated equitably. It ought to be reiterated first how the Spongebob Plan is suitable limited to small insolvent limited companies with insufficient realizable assets to cover the price of a voluntary liquidation via an Insolvency Practitioner.

It should be remembered that physical property such as stock and equipment typically only raise a fraction of their publication value in liquidation while debtors are proportionately more valuable. Talk with a few IPs and when you can get someone to work on the foundation that his fee will come from the removal of the property then opt for it.

Under no circumstances however, signal a personal warranty to pay any shortfall. If an IP needs such a warranty then this rather demonstrates that your business is an applicant for The Spongebob Plan. The main responsibility in rules a director of a restricted company finding itself to be insolvent has is to cease trading.

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No further contracts, either sales or purchase, should be inserted into, and focus on long-term agreements should cease. If the business occupies leased premises then my advice generally is to vacate them immediately. All equipment and stock should be removed to a place of safe keeping such as a storage facility or a friend’s garage.

This is the key to the complete strategy. Adapt the following notice and send a duplicate to all lenders. It really is with deep regret that I must inform you that the above company has ceased trading due to becoming insolvent. The difficult decision to stop all trading activities has been pressured upon me in order to comply completely with my obligations in rules as a company director.

Unfortunately the business has inadequate realizable assets and no funds with which to appoint an insolvency practitioner and thereby initiate a voluntary liquidation. I am not in a budget to fund this personally, having lost my livelihood now. The company therefore will now lie in circumstances of ‘limbo’ until either Companies House strike it from the register or a creditor winds it up through the High Court, resulting in the Official Receiver being appointed as liquidator. When you are a creditor of the business, I’d ask that you consider taking this task to bring about the early resolution of the company’s affairs. The effect that the receipt of this letter is wearing creditors is interesting. Trade creditors specifically will generally take the view that there is nothing to be gained from tossing good money after bad and going after matters further. They will definitely not go to the trouble and hassle of winding the business up therefore nothing more will normally be heard from them.