It’s not even the beginning of the end…. It may just be the opportunity to start afresh, learning from all the mistakes made last time around.
This article has been inspired by the experiences of a couple of Renegades over the last few months, seeing the impact a struggling business can have on the owner, I thought sharing this might help others in the same situation.
You know the stats. Approximately 80% of businesses fail within 5 years. And 80% of those left fail in the next 5 years and so on.
Therefore, most of us will likely experience the bitter taste of failure at some point and the onus is on us as business owners to know when that time has come.
When a business becomes insolvent, it’s directors should appoint an Insolvency Practitioner (IP) to help them through the voluntary liquidation process.
Trouble is, for many, closing a business that doesn’t have any money at all can be a nightmare as the IP can often cost as much as £5000!
If your business still has some assets, the IP can usually sell these assets and pay their fees from the proceeds. The balance then gets distributed between the creditors of the defunct business.
But what happens when you don’t have any assets to sell?
The owner is often led to believe they have to pay the IP’s fees personally, but in reality, there is no legal requirement to put an insolvent company into voluntary liquidation, and certainly no legal requirement to appoint an IP.
In fact, all that’s required by law, is that once you know the business is insolvent you must cease to trade, and then treat all your creditors the same – do not favour any single creditor over the others.
So, if you ever find yourself in this situation, but don’t have sufficient assets to sell to generate the funds you need to pay the Voluntary Liquidation fees, then here’s a 5-step plan to help you stay in control of the solution to your problem… assuming you want to start over of course…
But be careful. When your business is in trouble and you want to sell your assets, this is often called a “fire sale” and as such, it’s highly likely that your assets and stock will only fetch a fraction of their real value.
Also, in my experience your debtor book (the people who owe you money) is also unlikely to be paid in full. I’ve personally had customers who disputed invoices claiming all sorts of reasons for non-payment… one was even a plc with over £1 billion in assets!
First thing you must do – Cease Trading
As a Director of your company, you have a fiduciary responsibility and, by law, if you become aware that your business is insolvent you must cease to trade.
Do not sell any more products or services, do not enter into any more contracts, do not buy any more stock, do not incur any more costs or overheads and stop work on any work in progress– you’re done.
In my experience, creditors can get aggressive quite quickly, especially landlords, the bank and the tax office… So, if you’re renting, you must surrender your lease immediately and put any assets into storage, whatever their value.
You do not want bailiffs knocking on your door and removing goods that’s worth nothing to them, but everything to you if you’re starting again! Also, bailiffs are only working for the creditor that appointed them and that doesn’t help the other creditors.
Next thing you must do – Write to your Creditors
Sending this letter to ALL of your creditors at the earliest opportunity is vital to the success of this plan….
With great sadness I wish to inform you that ?????? Ltd has become insolvent and must therefore cease to trade.
This has been one of the most difficult decisions I’ve ever made but I must ensure I comply with my legal responsibilities.
Sadly, we do not have assets of sufficient value to enable us to appoint an Insolvency Practitioner to take the business into voluntary liquidation, nor am I in a financial position to fund this personally.
As a result, the company will now lie in a state of ‘limbo’ until we are either struck off by Companies House or wound up by a creditor.
As one of our creditors, you have the right to, and could consider applying for our company to be wound up and help us resolve the situation quickly.
For the most part, your creditors will understand they’re unlikely to get anything from the exercise and will actually be throwing good money after bad. Why would they spend even more money to put your company through, knowing they still won’t get anything back right?
The third thing you must do – Chase your Debtors
If anyone owes your business money you’d better start chasing it before they find out you’re closing the business. As I said before, if they sense a problem, some will do anything they can to avoid paying.
Force them to pay or explain why not. Deal with any queries or complaints. Offer them early settlement discounts. Just get as much money in as you can because this will either, reduce your overdraft or provide some money to pay your creditors once you’ve completed this exercise.
Technically, you should “ring-fence” this money to share equally amongst your creditors, but this is almost impossible. As a good friend of mine says… “it is what it is!”
It’s possible any future liquidator could try to claim back these payments, but it’s not really going to make your position any worse as long as you’ve not made any intent to defraud your creditors.
Next thing you should do – Apply for Strike-Off
This next step is not a legal requirement, but I would certainly recommend that 3 months after you cease to trade, you should apply to have the company struck off the Companies House register.
As long as there is no pending legal action against the business, you can download form DS01 from their website, submit it and send copies of this form to all of your creditors.
Companies House will let you know if anyone objects, though it’s unlikely your trade creditors will object, though the tax-man just might if they believe there are outstanding debts. That’s actually a good thing for you, as whoever objects will most likely issue a winding up notice, which is what you want anyway.
If no-one tries to wind you up within 3 months, apply to be struck off again, Companies House will eventually give in and accept the application.
Director’s Loan Account (DLA)
Many Directors take payments directly from the business and consequently find their DLA’s are overdrawn. Meaning the Director owes this money to the business and the tax-man could chase the Director for payment of the overdrawn account.
In theory, if you can strike the company off without a liquidator being appointed, the only people who know there’s an overdrawn DLA, are you and your accountant. As far as I’m aware, you’re not breaking any law, so what have you got to lose?
Final thing – Winding Up
Most business owners are paralysed by the fear of the unknown and so end up being taken advantage of and massively out of pocket.
My advice is to hold your nerve, don’t panic and simply let the winding up process take its course. When it’s done, you’ll get a letter from the Office of the Official Receiver informing you that the company is now in liquidation.
You’ll probably have to attend an interview at their local office and you’ll have to complete a questionnaire. Don’t worry about the interview, just be humble, don’t be a smart arse and treat them with the respect they deserve.
They have a job to do, once they’ve done it and close your file, they can tick a box and move on… help them do it and it will lift a weight off your shoulders. But wind them up and they can make life much more difficult than it needs to be.
Once you get the notification your company is dissolved, you can move on and focus on the next step on your entrepreneurial journey.