The majority of contractors who close their companies do so when it is solvent. Happy days!
However, there are times when a contractor finds themselves with serious cashflow problems – typically due to taxes they can’t pay. The contractor will need professional help to close the limited company, normally so that they can then take up an employee role.
How to help a contractor with cashflow problems?
Doing nothing is an option for the director – but it is not one that we would recommend. This is likely to result in the company’s creditor (i.e. HMRC) petitioning for the company to be wound up. Most directors want to avoid this because letting a company go into compulsory liquidation is a sign of complacency and recklessness, and could affect their future borrowing requirements. Also the director would have no control over which Insolvency Practitioner is appointed or the timings for the liquidation of their company.
Dissolving the company is also an option. However, many directors prefer not to use this option due to concerns that something could come back to haunt them (e.g. a creditor they had forgotten about).
The disadvantages of the above options can be avoided by opting for a Creditors’ Voluntary Liquidation (CVL) (also known as an ‘insolvent liquidation’). A CVL will address the director’s situation and ensure they meets all their legal obligations. The director can choose which Insolvency Practitioner (IP) they use, which means they can chose someone they like, as well as having some control over the timings involved. – although every IP’s primary duty is to the creditors.
What about an Overdrawn Director’s Loan Account?
Where there is no Overdrawn Director’s Loan Account (ODLA) and the only creditor is HMRC, the CVL process is relatively simple. As a result, the IP’s fee should be relatively cheap – which is why it is so appealing for directors.
If an ODLA does exist, the process is more complex. The director will have to repay the loan, so a ‘Statement of Means’ will be calculated to ensure the payment terms are realistic and acceptable for all parties.
How can an Accountant help?
As the Accountant, you can help your clients by contacting those who:
- are not paying their taxes on time (or at all)
- have an unusually large ODLA
- are known to be go through a difficult situation (e.g. lack of work, ill-health, divorce).
Having an early discussion with clients can help to avoid potential serious cashflow issues. If additional expert advice is needed, a good Insolvency Practitioner will be happy to give you free advice.
If a CVL is required, as the Accountant you would be involved in the closure process – including establishing a workable Statement of Means.