How Much Does it Cost to Liquidate a Company?
There are two routes to liquidate an insolvent company, either wait for the company to be forced into compulsory liquidation by a creditor, at no cost to the company, or by entering a Creditors’ Voluntary Liquidation (“CVL”) which requires payment to the Insolvency Practitioner (“IP”). Unlike with a compulsory liquidation, the Official Receiver plays no part in a CVL. Instead an IP must be appointed and there is a cost associated with doing this.
Fees charged are usually referred to as ‘pre’ and ‘post’ appointment fees, or ‘statement of affairs fee’ (pre) and ‘Liquidators’ fees’ (post). So, there could be a fee for assistance with placing the company into CVL and a fee for administering the CVL. These are discussed in the article.
It may be tempting to try and avoid paying the costs of a creditors’ voluntary liquidation, by waiting for a creditor to petition for a compulsory liquidation; however as our article Compulsory vs Voluntary Liquidation ‐ What’s the Difference? explains, there are important differences between the compulsory and voluntary routes. Directors must be mindful of their fiduciary duties and not worsen the position of creditors. However, there are some circumstances where waiting for a compulsory wind up to happen, is the advisable route.
Pre Appointment Fees
This is a fee charged by an IP for placing the company into CVL. The level of fees charged can vary significantly by IP, as well as depending upon the size of the company and complexity of work required to place it into CVL. Often the basis of the fee is a fixed fee, meaning that it is a one off, fixed cost. A range of £4,000 – £6,000 is a typical charge for a small limited company with few assets. There are a number of ways that this can be paid, which are explored further in the article. If the fee is paid prior to appointment, it does not require approval from the creditors, if it is drawn after the company has gone into CVL, then the Liquidator must get approval from the creditors for this, in addition to the director approving the amount.
Post Appointment Fees
This is a fee charged by an IP for administering the case. Often, where there are limited assets and limited actions to take post appointment, a fee will not be charged, just the pre appointment fixed fee will be due. This is agreed with the IP before the CVL process commences. If the company does have assets, an IP may take a post appointment fee. It is difficult to estimate what that fee would be, as it depends upon the complexity and potential requirements involved.
Insolvency Practitioners’ fees are paid first (see our article Who Gets Paid First in a Company Liquidation? for further details) and they must provide to creditors, the basis of their fee request and a written summary of their estimated fees and expenses before requesting that creditors approve their remuneration. Bridgewood offer a voluntary fee cap, to ensure that more funds are available for the benefit of creditors where possible, post appointment, if there are likely to be funds available to draw a fee.
How Can the Costs of Liquidation be Paid?
Via the Directors’ Personal Funds
If no other funds are available to cover the liquidation fees (i.e no cash in the bank and no company physical assets) and the directors wish to avoid compulsory liquidation, then it is not uncommon for them to meet the costs using personal funds. This may be from savings, using monies raised from the sale of personal assets (e.g. a car) or even via personal credit such as a personal loan or credit card.
If the director is paying the costs, then the IP will usually agree a pre appointment fee only and a post appointment fee will not be drawn.
Third Party Funds
Similar to the director paying, a third party known to the director, may offer to pay the costs required to place the company into CVL. Again, an IP will usually agree a pre appointment fee only and a post appointment fee will not be drawn.
From Funds Realised by the Sale of Company Assets in the Liquidation
Once appointed, one of the liquidators’ main roles is to realise the company’s assets and the funds obtained, are used to pay the liquidation costs first. If there is a shortfall, it would be for the director or third party to pay the agreed balance.
There are a number of ways the costs of liquidation can be met. If your business is showing any warning signs of insolvency, we encourage you to seek the advice of an IP. Bridgewood are happy to discuss options and give advice for free, so that you are able to make a decision regarding the future of the company.