Just like your lunch contractors, there’s no such thing as a ‘free liquidation’

It’s usually the taxman who struggling limited company contractors are wary of when it comes to insolvency.

But in an underlining of just how different covid-19 has made things, it’s now industry that such PSCs need to be careful of, not the Revenue -- which has been praised for suspending the wrongful trading rules and granting three-month breaks on Voluntary Agreements.


In fact, limited companies must not only take control of their situation early on if liquidation is looming, such as by seeking qualified, reputable help, but now they must also not be hoodwinked into a ‘free liquidation’ services, which are being touted during this coronavirus crisis as part of the insolvency process, writes John Bell, co-founder of insolvency specialists Clarke Bell.

This is normally conducted via a Creditors’ Voluntary Liquidation (CVL) and it’s here, with CVLs, we must start, if we are to unravel why PSCs shouldn’t fall for claims of ‘free liquidation.’

So, liquidating an insolvent company is done via a CVL.

CVL: quick refresher

A company director can propose a CVL if their company cannot pay its debts, i.e. it is insolvent and the shareholders agree and pass a ‘winding-up resolution’. This means that a licensed Insolvency Practitioner (IP) takes control of the company assets with the intention of either repaying creditors or distributing the money realised to shareholders. 

Business owners need to understand that a CVL is not a Compulsory Liquidation – which occurs when a creditor attempts to force a company out of business in order to recover any debts owed to them.

Once a company does embark on a CVL it will stop trading and be wound up. A CVL is a formal recognition of your duties as a director to any of the company’s creditors.

So, a director can propose a CVL if:

  • their company can’t pay its debts – i.e. it is ‘insolvent’
  • the shareholders agree and pass a ‘winding-up resolution’

As a contractor directing your own PSC, you must appoint a licensed Insolvency Practitioner to complete a CVL, and they will charge a fee for their expertise.

However, right now and no doubt aware of the monetary pressures which the pandemic has worsened for the already financially-distressed, there are some operators who advertise ‘free’ liquidations.

How does a so-called ‘free liquidation’ work?

In the process of liquidating a company, the director(s) may be entitled to redundancy pay.

To be entitled to redundancy, directors must also be classed as employees and there are certain criteria that must be met.

For example, the director must be paid by PAYE, work a minimum of 16 hours per work, and have a practical role rather than just an advisory role. Note, directors who are not employees have no legal rights as employees, and this could affect the payment of any claims that the directors might have against a company subject to an insolvency procedure.

But when you come across these IPs who offer to liquidate your company for ‘free,’ they actually do so by using the redundancy pay-out to fund your company’s liquidation!

Whereas a licensed IP will charge you for the process, their fees include processing the redundancy of the directors. This means that they do not charge a fee or percentage of any redundancy claims the directors get. Their whole claim goes to the director.

Just look at the following estimated sums that contractors can expect to see with these two very different models, and you’ll see why the ‘free’ claim just doesn’t stack up.

A ‘Free’ CVL service: in numbers

Liquidation fee upfront – paid by director £0
Director’s redundancy claim – processed by the company referred to by the liquidator £10,000
Referred company’s charge for assisting with the director’s redundancy claim £10,000 x 17.5% = £1,750
Liquidator’s fee for placing the company into CVL £4,000 + VAT = £4,800
Total amount director pays for liquidating their company £1,750 + £4,800 = £6,550
Redundancy claim director receives after all the costs of the liquidation process £3,450

A typical CVL Service: in numbers

Liquidation fee upfront – paid by director £1,995 (includes VAT)
Director’s redundancy claim – processed by the liquidator £10,000
Practitioners charge for assisting with the director’s redundancy claim £0
Total amount director pays for liquidating their company £1,995
Redundancy claim director receives after all the costs of the liquidation process £8,005


Coronavirus is not only a health crisis; it's a wealth crisis too. So despite the UK apparently being over the worst of its infections and resulting deaths, over the coming days, weeks and months, many once-lucrative small companies will be closing their doors forever, as they succumb to the impact the virus has had on them. 

Taking the decision to wind-up your business because it’s insolvent is a big step that can be stressful. Only by doing it correctly, transparently and with proper advice and support (which doesn’t seek to mislead) can you mitigate that adverse impact, avoid any nasty surprises, and come to terms with the situation so you can actually begin to plan for your future. Whatever else you're told along your business departure journey, remember ‘There Ain’t No Such Thing As A Free Liquidation.’

Tuesday 26th May 2020
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Written by John Bell

John Bell is a Chartered Accountant and a Licensed Insolvency Practitioner.  He founded licensed insolvency practitioners Clarke Bell in 1994 and, to date, the company has conducted over 1,800 MVLs.
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