What are the potential risks of dissolving a company with debts (Spongebob Plan)?

Opting for the Spongebob Plan method to dissolve a company with debts may result in the loss of director redundancy pay, averaging around £9,000 per claim. Many directors can receive statutory redundancy pay if their company goes into liquidation or administration. But they cannot claim it if the company is struck off.


Will the strike-off option be good for your company?

In online business communities, there exists a company closure strategy often referred to as The Spongebob Plan. Essentially, it involves dissolution, also known as strike-off. 

However, the key distinction is that the company seeking dissolution may have outstanding liabilities, such as HMRC tax debts or supplier debts, that they cannot pay.

The Spongebob Plan earned its name from a member of the online message board, UK Business Forums. 

This website boasts a significant following, with a vibrant community of businesspeople exchanging ideas, worries, and advice — some helpful, some less so.

The Spongebob Plan recommends that directors of insolvent companies initiate the strike-off (dissolution) process and hope that the company is dissolved at Companies House without interference. 

However, certain creditors, like HMRC, may oppose the strike-off because they are owed money, leading to the rejection of the application. More details about the outcomes in such scenarios can be found here.

But if the strike-off application proceeds without objection — typically because the debt is deemed low-level — voilà, the company is dissolved.

At this point, numerous company directors may perceive the situation as resolved. Essentially, they’ve paid £10 (the fee for the strike-off application, known as a DS01 form) to shut down their company and escape from debts. 

Nonetheless, in numerous instances, directors have also relinquished a potential financial gain, commonly referred to as director redundancy.




Director redundancy following liquidation

When an insolvent company shuts down via a liquidation process, the director(s) often have the opportunity to claim redundancy pay, which typically averages £9,000 per director. 

Unfortunately, awareness about director redundancy remains relatively limited, leading to many individuals missing out on their entitlement to claim.

To be eligible, the director must satisfy certain criteria, including being on the company payroll (receiving salary via PAYE) and the company must have been trading for a minimum of two years. 

Meeting these conditions significantly increases the likelihood of a successful claim. You can evaluate your potential claim here.

In a dissolution (strike-off) process, claiming director redundancy is not feasible. Therefore, while the £10 application fee might seem appealing compared to the average £4k or £5k fee for liquidation, only in liquidation can a director ensure the company is permanently closed with no possibility of restoration to the register. 

Crucially, liquidation is the sole avenue through which a director can claim redundancy.

In numerous instances, a financially constrained director may find it challenging to afford liquidation costs. 

However, the insolvency practitioner typically operates under the assumption that the director holds a valid redundancy claim and evaluates the value of such claim accordingly.

If the assessed value exceeds the liquidation expenses—bearing in mind the average claim of £9,000—the director can proceed with funding the liquidation and ultimately receive surplus funds after the process, tax-free.

For inquiries concerning company liquidation, director redundancy, and the risks associated with dissolving a company with outstanding debts, reach out to us for a complimentary consultation.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.