What is the £1 Insolvency Avoidance Scheme?
The £1 insolvency avoidance scheme is designed to help directors evade formal liquidation. The scheme works by a third party offering to buy an insolvent company’s shares and take over directorship of the company for £1. The purchasing company typically charges a flat fee of around £4,000 to £5,000 for ‘legal services’, or a percentage of the debt being eliminated from the insolvent company. The former director is then told that they are free to walk away, and their responsibilities are finished. The company which has just been bought is not formally liquidated and is now under new ownership.
Why would a company buy an insolvent company’s shares?
The purchasing company benefits from charging a ‘legal fee’ that is usually comparable to the cost of formal liquidation. However, the company is not formally liquidated and continues to exist. In some instances, the purchasing company will also sell off the insolvent company’s assets for further profit.
What happens to the insolvent company bought for £1?
Typically, the insolvent company remains dormant until creditors take action and issue a winding-up petition. This leads to compulsory liquidation, where the company is liquidated by the official receiver and can lead to the investigation of former directors.
What are the perceived benefits of the £1 insolvency avoidance scheme? And what is the likely outcome?
Directors will be sold a ‘pitch’ from the buying company, offering certain perceived benefits of entering into the £1 insolvency avoidance scheme. However, these perceived benefits come with significant negative drawbacks and don’t show the full picture.
- Perceived Benefit – Directors can walk away from the company
As directorship of the sold company has been transferred, the former directors are told by the purchasing third party that they are free to walk away from the insolvent company and can leave their responsibilities behind.- Likely outcome – Director conduct is still investigated
When the company is eventually liquidated, the former directors of the company are likely to be investigated. An insolvency practitioner or the official receiver can investigate a director’s conduct prior to a company’s liquidation, even if they have resigned from their position. A former director can still be questioned about their conduct, and if found to have acted inappropriately, can lead to directorship bans and personal liability.
- Likely outcome – Director conduct is still investigated
- Perceived Benefit – Avoid liquidation
The directors who sell their shares won’t have to engage with an insolvency practitioner to enter their company into a formal liquidation procedure.- Likely outcome – The company is still liquidated
Although the directors selling their company will avoid immediate liquidation and engaging with an insolvency practitioner, the company is still likely to be liquidated and the directors conduct investigated.
- Likely outcome – The company is still liquidated
- Perceived Benefit – A clean directorship record
With the sold company not entering a formal liquidation procedure, the directors who sell their shares will avoid having a liquidated company on their directorship record.- Likely outcome – Liquidated company remains on director record
The scheme is deemed an unethical practice and can cause significant reputational damage, impacting the director’s ability to hold directorships, or licensing in the future. Companies House will also still hold a record of former directors for a liquidated company.
- Likely outcome – Liquidated company remains on director record
- Perceived Benefit – Cheaper alternative
The headline figure of potentially selling an insolvent company for £1, certainly appears as a cheaper option than paying an insolvency practitioner for the cost of a liquidation.- Likely outcome – Total costs comparable
The directors selling their company will still have to pay a ‘legal fee’ to the purchasing company, usually in the region of £4,000 to £5,000, or higher if a percentage of the debt in the business. This fee could alternatively be used to help cover the cost of an insolvency practitioner and isn’t always the cheaper option.
- Likely outcome – Total costs comparable
Why should directors avoid this scheme?
By engaging in an un-regulated act to avoid insolvency proceedings, directors who enter this scheme are not appropriately dealing with their company and should avoid it based on, but not limited to the below reasons:
- Not a regulated process
This is an avoidance scheme and not a formal liquidation process, the third party purchasing the shares are not regulated by a formal governing body.
- The company is not formally liquidated
An insolvent company should be formally liquidated. When a director is aware their company is insolvent, it is their responsibility to make sure the company does not worsen the financial position of creditors. - Personal Guarantees (PG) remain intact
Directors are not absolved of personal guarantees. These cannot be transferred to a new company director without the lender’s consent, if they can be transferred at all. PG lenders are likely to chase former directors if the terms of their payments within their contracts are broken. - Director’s Loan Account (DLA) is still valid
If and when the company which has been bought eventually enters into insolvency, the former directors of the company will still be held personally liable for any outstanding DLA.
Why should a director enter a formal liquidation procedure and not engage with the £1 insolvency avoidance scheme?
A Creditors Voluntary Liquidation (CVL) is a formal insolvency procedure and is the appropriate process for an insolvent company. Directors that enter their company into a CVL are protecting themselves personally and professionally, whilst ensuring that their company runs in compliance with the law and enters a regulated process.
- The company is formally closed and liquidated
A CVL can only be carried out by a licensed and regulated insolvency practitioner. The process ensures that the company is formally wound up and closed in accordance with regulations, providing peace of mind to the directors, who can be confident that the closure of their company has followed adheres to all legal requirements, allowing them to walk away. - Protection from legal repercussions
As the company closure has entered a formal liquidation and followed the correct regulations, directors won’t have to be concerned about potential future legal repercussions, regarding a company that won’t have been closed via the £1 insolvency avoidance scheme. - Unsecured debts are cleared
All unsecured debt is written off with the formal liquidation of the company. Allowing directors to move on without the burden of this debt.
How we can help
If your company is in financial distress and you are worried about the prospect of liquidating your company, we can provide you with free, confidential advice. We can explain the pitfalls of the £1 insolvency avoidance scheme and why if your company is insolvent, a formal liquidation procedure is the appropriate procedure.
- Speak with our initial advisers
Make contact with our team, via phone, filling in a form or online chat. If suitable, we will arrange a free consultation with one of our consultants to discuss your situation in depth. - Initial assessment
Our consultant will advise if the liquidation of your company is the most appropriate route forward, or if there are other avenues to explore. - Engage with Wilson Field
We will confirm the necessary steps to place the company into liquidation and would be engaged to carry out those steps on the director’s behalf.
In summary
The £1 insolvency avoidance scheme seemingly enables directors to avoid the formal liquidation of their company by selling their insolvent company’s shares to a third party for £1. The purchasing company charges a legal service fee, in the region of £4,000 to £5,000 and takes over the directorship, seemingly allowing the former directors to walk away. However, this scheme is not formal or regulated and still leaves directors liable for overdrawn directors’ loan accounts and personal guarantees. The purchasing company typically leaves the company dormant until creditors force compulsory liquidation, potentially leading to investigations of former directors. As a result, directors may find themselves having paid substantial fees while still facing the fallout of their company’s insolvency.
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