Is the Spongebob Plan a Good Idea? Advice From an Insolvency Expert

December 6, 2017

Back in 2013, a user on the website UK Business Forums wrote a guide on closing a limited company when you can’t afford to pay an insolvency practitioner.

The guide, which later became known as the Spongebob Plan, became tremendously popular on online message boards and is often recommended as an alternative to appointing an insolvency practitioner.

In this article, I’ll look at the Spongebob Plan in more detail and discuss whether or not it’s actually an effective and safe way to close a business.


What is the Spongebob Plan?

What is the Spongebob Plan?

The Spongebob Plan is a very simple five-step process designed to close down an insolvent business where it cannot afford the cost of a liquidation.

Here is how it works in practice.

(Note that I’ve removed the original Step 3 — Pursue Debtors and the original step Step 5 — Apply for Strike Off as these only apply to businesses registered in England.)

Step 1 — Cease Trading

Stop trading immediately. Stop taking on new contracts, stop making sales and stop all long-term work.

If you operate from leased premises, vacate immediately and inform the landlord.

The Spongebob Plan recommends moving all stock and assets to a safe location like a self-storage unit. However, if you have stock and assets, you really shouldn’t be following the Plan and ought to appoint a liquidator to safeguard your assets for the benefit of your creditors.

You cannot use stock and assets to pay off some of your creditors and you certainly cannot simply take them and close up shop.

Step 2 — Write to Creditors

The original Spongebob Plan guide provides a basic letter template, which you should personalise and send to your creditors.

It informs your creditors that you are insolvent and do not have the funds to pay your debts. It also tells them that your company will either be struck off by Companies House or wound up by a creditor.

Step 3 — Apply for Strike-Off

Three months after you’ve ceased trading, you can apply to Companies House to have your company struck off the register.

To do this, download and complete form DS01 and send a copy to Companies House and all your creditors. Your creditors will have an opportunity to object to the striking-off.

What’s wrong with the Spongebob Plan?

What’s wrong with the Spongebob Plan?

Despite its cult online status, the Spongebob Plan has several serious flaws. If executed poorly, this approach can open up directors to serious penalties, including personal liability for debts and being struck off as a director.

In this section I will run through four serious concerns I have with the Spongebob Plan.

Insolvency practitioners aren’t expensive

In his original post, the Spongebob author claims that he was quoted £10,000 from an insolvency practitioner to complete a simple liquidation. He claims he created the Spongebob Plan as a cost-effective alternative to these eye-watering fees.

If this story is true, the liquidation fees are truly ridiculous.

What I suspect has happened is that the author looked for an insolvency practitioner on the internet and picked the first result he could find. This, in all likelihood, was a firm with an enormous marketing budget and fees to match.

A good insolvency practitioner will not charge such high fees for simple and small liquidations.

It ignores directors’ duties

The Spongebob Plan can be interpreted as suggesting that a director should continue to run an insolvent and loss-making business until there is nothing left and then close up shop.

This is completely contrary to a director’s duties and obligations and runs the very real risk of having action taken against you personally either by a creditor or, more likely, by the Insolvency Service or Government.

This can lead to personal liability for the company’s debts, fines and being struck off as a director.

It forgets about ongoing duties

The Spongebob Plan seems to revolve around shutting your doors, ceasing trading and walking away. This completely ignores other ongoing director’s duties.

Even though you’ve ceased trading, you still have to complete your annual returns, annual accounts, annual tax returns, VAT returns and so on. Just because you’ve closed the doors doesn’t mean you can suddenly ignore everything else.

Again, failure to comply with your director’s duties can have serious future implications, especially if you have other businesses or plan to have other businesses in the future.

Failing to keep up with these duties can also lead to you being taken to court and struck off.

It rides roughshod over employees

Although the Spongebob Plan is designed for small businesses, of which 76% are non-employing, it's possible that your business employs people.

If it does, you must think about the rights of your employees.

Even if your business is insolvent, you may still owe your employees arrears of wages, holiday pay and their redundancy entitlement. You cannot close the door and refuse to pay your employees what they are owed.

While the Government has designed a safety net to pay employees what they are owed in the event of insolvency, it only kicks in when the company is formally wound up rather than closed and this requires a liquidator to be appointed.

Simply leaving it for one of your creditors to do it will, at best, mean your employees don’t get paid what they are due for a very long time or worse they will never get paid because no creditor puts the company into liquidation.


Is your business in trouble?

If your business is struggling, it’s incredibly important that you seek specialist advice as soon as possible. While online discussion forums are an excellent source of information, they can’t match the input of a talented and experienced insolvency practitioner.

If you choose the right insolvency practitioner and give them enough time, they will be able to save a business — so long as there’s a viable business to save.

Contact our office today for free, confidential advice to see how we can help.

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