In many cases, yes. If a company has money available in its bank account, outstanding invoices that can be collected or assets that can properly be sold, those funds can usually be used towards the reasonable cost of placing the company into a Creditors’ Voluntary Liquidation.
A director does not automatically have to fund the liquidation personally. A CVL is a formal process relating to the company, and the law recognises that the costs of dealing with the company’s affairs may be paid from its assets.
However, once a company is insolvent, its money cannot simply be used in any way the directors choose. The funds still belong to the company and must be protected for the benefit of creditors. It is therefore important to establish where the money has come from, whether it is genuinely available to the company and whether any winding-up proceedings have already begun.
A Creditors’ Voluntary Liquidation, usually known as a CVL, is a formal insolvency process used when a company cannot pay its debts and is no longer able to continue trading.
The directors begin the process, but the shareholders must pass the necessary resolution to wind up the company. A licensed Insolvency Practitioner is then appointed as liquidator.
Once appointed, the liquidator takes control of the company’s affairs. Their role includes protecting and realising company assets, collecting outstanding debts, dealing with creditors, reviewing the conduct of the directors and distributing any available money in accordance with the statutory order of priority. (GOV.UK)
Where the company has sufficient funds, it will often be appropriate for the company to meet the costs of its own liquidation.
Section 115 of the Insolvency Act 1986 provides that expenses properly incurred in a voluntary winding up, including the liquidator’s remuneration, are payable from the company’s assets, subject to the applicable statutory priority rules. This means liquidation expenses are generally dealt with before money is distributed to ordinary unsecured creditors. (Legislation.gov.uk)
Before the liquidator is formally appointed, the company may also pay reasonable professional and procedural costs required to place it into liquidation. The payment should be properly authorised, clearly documented and made directly for genuine work associated with the proposed CVL.
The proposed liquidator should explain what the payment covers, including any pre-appointment work, statutory expenses, disbursements and post-appointment work. The liquidator’s formal remuneration is subject to the statutory approval process, and creditors are provided with information about remuneration and expenses. The basis of remuneration will generally be determined by the liquidation committee or, where there is no committee, by the creditors. (Legislation.gov.uk)
Directors sometimes feel uncomfortable using the company’s remaining money to pay for a liquidation when HMRC, employees or suppliers may not be paid in full.
However, a liquidation cannot be completed without professional work and statutory administration. The liquidator must secure assets, collect outstanding invoices, communicate with creditors, deal with employees, complete statutory filings, investigate the company’s affairs and distribute any available funds.
These costs are incurred as part of dealing with the company properly and protecting the interests of the creditor body as a whole. In a CVL, the liquidator acts in the interests of creditors rather than for the personal benefit of the directors. (GOV.UK)
A reasonable payment for the work required to place a company into CVL is therefore different from using company funds to repay a favoured creditor or to benefit a director personally.
The most straightforward source of funding is usually a positive balance in the company’s bank account. Where there is no winding-up petition and no restriction over the funds, the payment can often be made directly from the company’s account to the Insolvency Practitioner.
Other possible sources may include money received from customers for work that has already been completed, payments collected from trade debtors, cash properly recorded as belonging to the company, or the proceeds from selling company assets for their proper value.
Money repaid to the company may also provide funding. For example, where a director owes money to the company through an overdrawn director’s loan account, repayment of some or all of that balance may create funds that can be used towards the liquidation.
Every case is different, so the source of funds should be reviewed before any payment is made.
Potentially, but the sale must be handled carefully.
Where a company has little or no cash but owns equipment, vehicles, stock, machinery or other assets, those assets may be capable of being sold to raise funds. However, directors should not sell or transfer assets without first speaking to an Insolvency Practitioner.
The assets should normally be professionally valued, and any sale should be properly documented and completed for a reasonable market value. This is particularly important where the purchaser is a director, shareholder, connected company or proposed new business.
An asset should never simply be transferred to the director or a new company for a nominal amount. Under section 238 of the Insolvency Act 1986, a liquidator can challenge a transaction where company property has been given away or sold for significantly less than its true value. (Legislation.gov.uk)
In some cases, it may be more appropriate for the asset to remain with the company and be sold by the liquidator after appointment. The correct approach will depend on the nature of the asset, whether it is subject to finance or security and how quickly the liquidation needs to proceed.
Where company funds are being used, the payment should normally be made directly from the company’s bank account to the Insolvency Practitioner.
The director should not transfer the money into a personal account and then use it to pay the liquidation fee. Doing so creates an unnecessary and potentially problematic transaction between the company and the director.
This remains the case where the company owes money to the director. The director should not repay themselves from the company’s remaining funds simply so that they can then make the payment personally.
Once a company is insolvent, the directors’ responsibilities shift towards protecting creditors. The Insolvency Service advises directors to protect company assets, avoid prioritising creditors improperly and ensure that their actions do not worsen the financial position of creditors. (GOV.UK)
Keeping the payment direct, transparent and fully recorded provides a clear audit trail and reduces the risk of misunderstanding later.
Not necessarily.
A positive balance on a bank statement does not always mean that the whole amount can be used. The bank may have rights of set-off against an overdraft, loan or other liability. There may also be a fixed or floating charge over some of the company’s assets.
Money held for someone else may not belong beneficially to the company at all. This could include client money, tenant money, money held under a genuine trust arrangement or funds that have been contractually ring-fenced for a particular purpose.
The position of customer deposits and advance payments can also be complicated. Some payments will be ordinary company funds, leaving the customer with an unsecured claim if the service cannot be delivered. In other cases, the circumstances may indicate that the money is held on trust or remains the property of the customer.
Money held by a different company within the same group cannot be treated as though it belongs to the insolvent company. Each limited company is a separate legal entity, even where the same people own or manage both businesses.
These issues should be reviewed before the liquidation payment is made.
Directors should be extremely cautious about taking new borrowing, increasing an overdraft or drawing against an unused credit facility simply to fund the liquidation.
An unused overdraft is not an existing company asset. Drawing further money increases the company’s liabilities and may worsen the position of creditors.
Taking additional credit when the directors already know that the company cannot repay it could also lead to questions about the directors’ conduct. Professional advice should therefore be obtained before any new borrowing is used.
This is different from a director, shareholder or other third party choosing to fund the liquidation from their own money.
A winding-up petition changes the position significantly.
Once a petition has been presented, payments from the company’s bank account can be caught by section 127 of the Insolvency Act 1986. This provides that, in a compulsory winding up, dispositions of company property made after the commencement of the winding up are void unless the court orders otherwise. For this purpose, the compulsory winding up will usually be treated as commencing on the date the petition was presented. (Legislation.gov.uk)
The company’s bank account may also be frozen once the bank becomes aware of the petition. A court validation order may then be required before the company can access or use the account. (GOV.UK)
Directors should not attempt to move the money, withdraw cash or pay a liquidation fee without specialist advice once a petition has been presented. The position may still be capable of being resolved, but the petition, hearing date, bank position and proposed CVL must all be considered urgently.
A threat of a winding-up petition, a statutory demand and an actual petition are not the same thing. It is therefore important to establish precisely what action has been taken and on what date.
Where the company has no cash and no readily realisable assets, a director, shareholder or other third party may be able to fund the liquidation personally.
This does not make the director personally responsible for all the company’s debts. It is simply a contribution towards the cost of placing the company into the appropriate formal process.
The payment arrangements should be agreed and documented in advance. A person funding the liquidation should not assume that the money will automatically be repaid from the company’s assets later.
Other possible sources of funding may include collecting an outstanding customer invoice, recovering money owed to the company or arranging for an asset to be valued and sold properly. The Insolvency Practitioner should advise on the safest approach before any transaction takes place.
Where there are genuinely no funds or assets and nobody is able to meet the cost, the available options may be more limited. However, directors should not simply ignore the company or assume that an application for strike-off will resolve unpaid creditors. Early advice is important so that the alternatives and the directors’ continuing responsibilities can be considered.
A company has stopped trading and owes £70,000 to HMRC and £25,000 to suppliers. It has £6,000 in its bank account, no outstanding winding-up petition and no security affecting the money.
After taking advice, the directors conclude that the company cannot continue and decide to begin a CVL. The company pays the agreed liquidation costs directly from its bank account to the Insolvency Practitioner. The payment is recorded in the company’s books and disclosed as part of the liquidation process.
Any remaining company funds, outstanding invoices and asset-sale proceeds are then dealt with by the liquidator for the benefit of creditors.
In those circumstances, using the company’s money to meet the reasonable cost of the CVL would ordinarily be an appropriate use of company funds.
The position would be different if the money belonged to customers, was subject to a restriction, had been transferred through the director’s personal account or was paid after a winding-up petition had been presented without the necessary advice or court authority.
The important point is not simply whether the company has money. It is whether that money genuinely belongs to the company and can lawfully and properly be used.
Before making a payment, the directors should establish:
Molly Monks F.I.P.A of Parker Walsh is a licensed Insolvency Practitioner with more than 20 years’ experience advising company directors. Parker Walsh can review the company’s funds, assets, creditors and legal position and explain the safest and most appropriate way to fund a Creditors’ Voluntary Liquidation.
Our initial advice is free, confidential and provided directly by our in-house team.
Not necessarily. Where the company has funds or realisable assets, the company may usually meet the reasonable costs of its own liquidation. Personal or third-party funding may be required where the company has no available money.
Often, yes, provided the money belongs to the company, the payment is properly authorised and no winding-up petition or other restriction affects the account. The payment should normally be made directly to the Insolvency Practitioner.
Yes, in appropriate circumstances. The law recognises that properly incurred liquidation expenses must be paid before distributions are made to ordinary unsecured creditors. The costs must nevertheless be reasonable, transparent and connected with the liquidation.
Potentially, but the asset should be properly valued and sold for a reasonable amount. A director should not transfer an asset to themselves or a new company for less than its value. Advice should be obtained before the sale takes place.
This depends on the legal status of the money. Some customer payments will form part of the company’s general funds, while others may be held on trust or subject to a specific restriction. The position should be checked before the money is used.
You should not make any payment without urgent professional advice. The bank account may be frozen, and payments made after presentation of the petition may be void unless authorised by the court.
I am Molly Monks, a licensed insolvency practitioner at Parker Walsh. I have over 20 years of experience helping directors with the financial struggles they may face. I understand that it can be overwhelming and stressful, so I offer practical straightforward advice, which is also free and confidential. I spend time with directors to get a good understanding of their business and their goals, therefore providing the best tailored advice possible.
Email: molly@parkerwalsh.co.uk
Phone: 0161 546 8143
WhatsApp: 07822 012199
.webp)
.webp)
.webp)
.webp)
