Contractors, unqualified insolvency advice is for the birds

A bit like the IT, accountancy and IR35 spaces, the insolvency market is concentrated with rogue players.

The dark web

In fact, the insolvency market has its own dark web of insolvency 'advisers' and business rescue 'experts' with no credentials and limited technical expertise, offering unqualified company closure advice.

While any limited company contractor battling the risk of insolvency will want to live frugally, cutting corners when seeking insolvency advice can prove costly, writes Dave Broadbent, insolvency partner at UK Liquidators.

Director conduct is scrutinised by the Insolvency Service after winding-up

Take note of what's at stake.

If your limited company is closed in a manner other than that prescribed by the Insolvency Act 1986, the Insolvency Service has the power to come knocking and investigate director conduct — even after the company is shut down.

Officials may look at a limited company director's exposure to the Wrongful Trading rules, for example.

As a winding-up director, in seeking advice, if you are promised 'alternative' routes through which to disassociate from business debts, it's unqualified advice, and an Insolvency Service investigation may be just around the corner.

Are limited company directors more prone to an Insolvency Service probe?

Since covid, Bounce Back Loan misuse —intentional or otherwise — triggered new legislation, the Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act 2021.

This legislation green-lights investigations into limited company director conduct, after a company is buried, without reinstating the company.

The result? If you're caught in the crosshairs of creditors, and make a questionable exit, your escape may be short-lived.

How can the Insolvency Service penalise or punish contractor-directors?

If the Insolvency Service investigation finds you guilty of director misconduct, you could be:

A costly misjudgement (that's yours to avoid)

As I've advised contractor-directors previously, if you have just one shot at funding the liquidation of your limited company and you cash out on a falsely marketed or sham service, you could be left gravely out of pocket.

And you risk being left to raise funds again to appoint a legitimate licensed insolvency practitioner ("IP").

IP fees: How much will an insolvency practitioner cost?

When seeking insolvency advice, if the price quoted and promises made feel too good to be true, perform 'due diligence' and use the market average to engage an IP as a benchmark.

While the market average for a CVL (Creditors' Voluntary Liquidation) sits around the £4,000 mark, this can climb to £6,000+ if the CVL is complex.

Many CVL 'factories' offer a rock-bottom CVL service starting from £1,499. However, read the fine print as it usually excludes additional costs that are part and parcel of a CVL.

Further be aware, although the Insolvency Service is cracking down on unlicensed insolvency advisers and rogue firms promoting phoenixism, the market remains a breeding ground for unauthorised firms.

What company closure activities are Insolvency Practitioner-required?

Remember, acting as an IP is a regulated profession and therefore, certain activities are strictly reserved for an insolvency practitioner, such as undertaking insolvency appointments.

If you're already speaking to an insolvency adviser, it's not too late to practice prudence. Check whether they're a lead-generation company commissioned by an insolvency firm to drive referrals, or an in-house business development team.

The rise of lead gens

In addition to unlicensed firms and insolvency advisers, take note of these lead-generation companies. These are usually third-party firms commissioned to generate and nurture insolvency leads on behalf of an insolvency practitioner or an insolvency practice. As such, their primary focus is to drive referrals.

Unqualified insolvency advice must be validated by a licensed insolvency practitioner to avoid falling into the net of false promises and contradictory advice — a common stumbling block for limited company (also known as Personal Service Company) directors.

Employ a 'value for money' test, especially when closing a company

When a company is bleeding funds, spending money on an insolvency practitioner may seem excessive.

However, an IP is a necessary expense if you choose to voluntarily liquidate your company, and the same applies to solvent companies.

So it's worth asking the question:

When is an Insolvency Practitioner a must-have for company directors?

Bottom line if bust? Think, 'One final transaction to tie up things properly'

The bottom line is that, although it may feel counter-intuitive at a time when company finances dictate your company must cease operating, paying for advice that is qualified is in your best individual and professional interests.

As with any other stage of running an enterprise, value for money should be thoroughly considered when seeking the services of an insolvency practitioner.

Consider it to be just another transaction. If company finances are squeezed, check your entitlements, such as whether you're eligible to claim director redundancy, and speak to your insolvency provider about payment flexibility, such as payment plans.