Contractors' Questions: Must their invoice be paid even if we've shut?

Contractor’s Question: Would the IT company I worked for, or me personally as its employee, be liable to pay an invoice that was received after the company ceased trading?

Put another way, the company and I were not aware of an outstanding invoice when the company closed down so in what circumstances, if any, would we be legally obliged to pay the invoice?

It turns out the invoice was sent to our company’s address which we ceased to operate from when we closed. But it’s taken almost seven months for the party who sent the invoice to me/the company to chase us up. I find it odd that it’s taken them this long to query non-payment but our accounts suggest no money was paid to them.

Their contract was cancelled in early June; we stopped trading in October and their invoice finally reached us in December. At the time of cancelling the contract, I asked the party if there were any monies we owed but I never received a reply. Our phones were operational until October, but the party never rang either. Can we therefore ignore this payment demand on our business, not least because there’s no business anymore to pay them?

Expert’s Answer: When a company ceases to trade, it is not automatically absolved of its liabilities and as such any contractually agreed payments are still liable for payment. The problem, in our experience, is that once a company ceases to trade, it will rarely have any assets remaining within it. This means that even if the company wanted to make payment, chances are it does not have the means to do so.

In this particular instance you state the contract was cancelled in June and the company ceased trading in October, but subsequently a demand for payment was received in December. Given the delay between cancellation and receiving the new invoice, it is likely this is a fixed-term contract that is set to run for a contractually stipulated duration. Either that or your original cancellation was not accepted or enacted by the creditor. Unfortunately without seeing the contract in question it is impossible to say.

But let us assume for a moment that the contract is still in force and that the requested payment is legally due. The fact that you have not been chased for the payment up until now does not in and of itself negate the now defunct company's liability. In fact, the statute of limitations gives six years for a creditor to launch a claim for non-payment. As such the company is still liable for payment within that period.

The issue is that, as your company has now ceased to trade, there are no assets leftover from which to make payment. In that case the creditor could theoretically take further action, such as issuing proceedings in the County Court or petitioning the courts to declare the company insolvent, but this will not change the underlying position that the company does not have the assets to satisfy any award.

Situations like this are not unusual and are usually easily settled with a pragmatic approach.  We would suggest you write to this creditor confirming that the company ceased to trade on the specified date and that no assets remain inside the business. It will help your cause if your accountant is prepared to write a letter on their own letterhead confirming this is the case (as third party verification will likely be sought). If you have prepared a final set of accounts you could also include this with your correspondence, in order to further demonstrate the financial standing of the company (or lack thereof). One would expect the creditor to see that the debt is a write off, given the debtor company's financial position.

In relation to an employee being liable for a debt incurred by the business they worked for, this is not something we have heard of in our three decades of trading and would be extremely unusual under the circumstances. Generally, if you sign a contract on behalf of a limited liability entity, the officers and shareholders of said entity are protected by the limited liability the company holds. The only exception to this would be if a contract included a personal guarantee of payment but, again, such guarantees are usually only sought from the shareholders and directors.

To summarise for you personally, you can relax; an employee has virtually no chance of being held liable for a company debt in the event the company ceases to trade.  As for the company, it may well still be liable for payment but if no assets exist what can a creditor do?

The expert was Adam Home of specialist debt recovery firm Safe Collections.
 

Editor’s Note: Related Reading –

Limited company directors; are you doing your duties?

Getting some closure: how to shut down your limited company

Contractors’ Questions: Is a company striking-off request bad if I’m unpaid?
 

Thursday 29th January 2015