Reviewed: 23rd April 2018
First of all it is important to know what ‘insolvent’ actually means when talking about the finances of a limited company. A company is classed as insolvent when its debts outweigh its assets and it is unable to meet its liabilities as and when they fall due. A solvent company on the other hand, will be able to meet its day-to-day liabilities and would be in a position to clear all outstanding debts within a 12 month period.
Although many companies are liquidated because they are insolvent, there are many solvent companies which are voluntarily liquidated. This may be due to retirement, the loss of a key client, changing customer demand, increased competition, or simply just a desire to move on to a new challenge.
One area which if often overlooked when testing a company’s solvency is the requirement to pay staff redundancy. Any employee losing their job as a result of the liquidation will be entitled to redundancy pay, subject to certain conditions such as the number of years served and the hours worked. This money needs to be paid by the company. It is important to remember in this instance, that the director of the company is often also classed as an employee and is therefore just as entitled to a redundancy pay out as any other member of staff would be. This is still the case even if you are the sole director and employee of a company.
In some instances it is possible that the requirement to pay the redundancy money is what tips the company from solvent to insolvent. This is best illustrated with an example:
Let’s say you have been running your company for five years, and have employed the same member of staff for the past three years. Sales have been falling, you are struggling to manage your cash flow, and you don’t see any future for the business. You decide to liquidate the company, allowing both you and your employee to move on and find alternative work elsewhere.
Your liabilities total £20,000 and are made up of both supplier debts and monies owed to HMRC. You hold a small amount of stock, an amount of money at the bank, and you are awaiting several invoices to be paid from reliable customers. Once recovered, this money will be enough to clear your liabilities in total, leaving very little left over. At first glance your company is solvent and will be meet the criteria for a Members’ Voluntary Liquidation (MVL).
However, both you and your employee are entitled to redundancy as you have both been working for the company in excess of two years. This money needs to be paid by the company; however, after clearing all its other debts there are not enough funds available with which to do this. This outstanding liability means the company is now insolvent and consequently, the options for liquidation are different.
If your company is unable to make the redundancy payments which are owed, staff (including the company director) will need to apply to the National Insurance Fund which is run by the Insolvency Service’s Redundancy Payments Office. The insolvency practitioner dealing with the liquidation of your company will be able to offer assistance in this area.
If you are considering closing your company and are worried about how you are going to be able to pay redundancy to your staff, contact Real Business Rescue today. You can arrange a free no-obligation consultation with a licensed insolvency practitioner who will be able to help you understand the position your company is in, and the most appropriate course of action going forwards. We have an extensive network of 55 offices offering confidential director support across the UK.
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