Contractors' Questions: Are my limited company's overdue accounts a valid reason to not pay me?

Contractor’s Question: I began work as a technician via an agency, with the sole aim of clearing my limited company’s tax liabilities. These arose after I was banned as a PSC by a previous client due to IR35 reform, abruptly ending all cash flow into the company.

I tried to dissolve the company but failed due to creditor objections. I explained this prior to taking the contract to both the new client and the agency. The agency was also fully aware of my company's status (accounts were overdue, active proposal to strike off), from the outset.

The agency contacted me about the proposal to strike off to say: “Our payroll team has asked to follow up with you regarding your limited company status. Companies House still has your company as ‘proposal to strike off.’ It will be imperative that this is sorted if we are to pay you into this account.”

I had already filed a DS02 to cancel the strike off, so this was promptly resolved. The agency had also advised me that their payment terms were 30 days, which I thought was a little unusual (a first for me in 20 years’ limited company contracting). But I therefore saw no cause for concern when I remained unpaid after four weeks.

By seven weeks, however, I started to become twitchy and contacted the agency, which said they were “unable” to pay my limited company as the accounts were overdue. So, are the accounts being overdue a legitimate reason for withholding payment to a limited company?

Lastly, I have requested that the agency provide a written explanation as to why they are unable to pay my company, the response to which has been that they are happy to explain it to me verbally over the phone. I would be most grateful for any advice.

Expert’s Answer: Where a company which has outstanding creditors files a strike off application, it is almost inevitable that a creditor will issue an objection to this.

It is likely that this scenario will become all the more common over the coming months and years given the prevalence of Bounce Back Loans in small companies.  While these loans are government-backed, they are recoverable from the company in the first instance, and banks need to be able to show that they have attempted recovery before relying on the government guarantee. 

Objection, dissolution and concern

It is also very common for HMRC to object to strike offs where a company is in arrears, or returns are outstanding, so directors of insolvent companies should always take professional advice before attempting to just dissolve them. This is of particular importance now that there is a risk of disqualification action being taken against the directors of dissolved companies.

Turning to your matter, as contractors may be aware, if a company is dissolved then it has legally ceased to exist with the effect that its assets are ‘bona vacantia’ and must be paid to the relevant government department. 

Clearly in your circumstances, the engager was concerned that with the possibility of striking off looming, they could be criticised for making a payment to the company rather than retaining the funds and paying them over to the government (since there may be a delay between the date of dissolution and notice of dissolution being publicly available). 

The technical (and practical) view

Technically-speaking, unless and until a company is actually dissolved, its director remains in control so it would not be a reason to withhold payment. 

Practically-speaking, however, it is better to avoid the situation arising altogether since it is likely to take as much time arguing with the engager over the situation as it is to correct the record in any event!

It is worth noting that a bank may take a similar approach to your engager in this situation (similar to if a winding-up petition is advertised), whereby they freeze accounts where strike off proceedings are contemplated. This can cause significant issues for contractors.

Not paying because of ‘accounts overdue’ doesn’t add up

Regarding the overdue accounts, however, it is difficult to agree with your partners’ claims that this is a valid reason to withhold funds.

At any given time, there will be huge volume of companies who have filing deficiencies, and those deficiencies can result in strike-off proceedings being brought against a company. Until that happens and strike-off action is taken, however, the company remains in existence and active, with the director able to act on its behalf and pursue the debts due to it.

As you have alluded to in your question, it is counterintuitive for funds to be withheld by the engager in these circumstances, since overdue accounts are an issue which commonly arise through an inability for a company to pay its accountant! 

Finally, go be assertive

It is perhaps telling that no written explanation can be provided (they want to speak to you over the phone only). And so ultimately, I would recommend that you pursue the debt owing to your company. All too often in my experience, excuses for non-payment arise from an inability to pay, so that (combined with the long payment terms) suggests to me that you should try to be assertive in terms of credit control. Good luck!

The expert was Gareth Wilcox, partner at Opus Restructuring & Insolvency.