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Can you liquidate a limited company with debts? What are the options for a director?

If your company is approaching insolvency, you may be wondering if voluntary liquidation is a possibility. Perhaps if you do not act quickly a secured or unsecured creditor could take the future of the company out of your control, at the same time exposing you and other directors to accusations of wrongful trading?

So, although voluntary liquidation is rarely seen as a positive move, one of its benefits is damage limitation to directors, and also potentially to creditors should they receive higher returns as a result.

Let us examine your options as a director if you are thinking of liquidating your company voluntarily.

There are two ways to voluntarily liquidate a company:

  • Members’ Voluntary Liquidation
  • Creditors’ Voluntary Liquidation

The most important point about Members’ Voluntary Liquidation is that it is only available to companies that are solvent. Even if you have numerous debts, if you are able to meet them as they fall due and the value of your assets exceeds the total liabilities held by your company, it could still be regarded as solvent.

Insolvency can be established using two tests – the cash flow test and the balance sheet test. It is advisable to seek the services of an Insolvency Practitioner to ensure the accuracy of figures used in these calculations. Professional input would also provide confidence that you are taking the correct route.

If the company is found to be solvent, a Members’ Voluntary Liquidation would be appropriate, but if insolvent you would need to begin a Creditors’ Voluntary Liquidation.

Begbies Traynor offer a same-day consultation free of charge. This is invaluable if you are under threat of legal action and need to move quickly.

Members’ Voluntary Liquidation

Once solvency is established, a sworn declaration to this effect must be provided ahead of the liquidation process. Shareholders or members meet to pass a resolution to wind up the company, after which an Insolvency Practitioner is appointed to undertake the sale of assets.

Money realised from the sale is used to repay all creditors in full. The company is then closed and directors are free to move on without any loss of reputation. Any remaining funds are distributed among the shareholders.

Creditors’ Voluntary Liquidation

This is the process by which an insolvent company is liquidated. In general, it is used by directors who are worried about personal liability for company debts. They may have acted improperly, or failed to comply with HMRC requirements on a regular basis.

Maybe a creditor is about to pursue them through the courts, and the best way out of a difficult situation seems to be Voluntary Liquidation. At the start of the process, a resolution is passed to wind up the company. This has to be voted in favour by a minimum of 75% (by value) of shareholders.

A creditors’ meeting follows, at which a full explanation of the company’s financial position is provided by the directors and appointed Insolvency Practitioner.

Begbies Traynor can assist in this role. We are the UK’s number one corporate recovery firm.

Once the liquidation process is complete and creditors paid as far as possible, any debts remaining are written off, and assuming that nothing untoward has been uncovered, directors are free to move on to another company or into employment.

Although liquidation may not appear to be a positive step, if the company is under relentless pressure from creditors and has been threatened with legal action, Voluntary Liquidation offers several advantages over Compulsory Liquidation by HMRC or an unsecured creditor:

  • Directors have control over the outcome
  • Reputations remain intact if directors have acted properly
  • Court procedures are avoided
  • The possibility of personal liability for company debts due to wrongful trading is minimised.

Is a director liable for company debts after liquidation?

Many directors ask us about personal liability for company debts, and if debts will be written off once the business has been liquidated. The answer is that once assets have been liquidated the company is closed, and in most cases directors hold no personal liability unless:

a) They have given personal guarantees to a secured creditor, in which case they will need to find the money to repay the debt should company assets not cover the total amount owed.
b) They are found guilty of unlawful trading or improper conduct as a director. This would follow an investigation by the Insolvency Service if the directors were suspected of carrying on trade whilst insolvent. This could potentially make them liable for some or all of the company debts.

Once the company is closed, you as a director, are free to move on.

We offer free same-day consultations from any of our local Begbies Traynor offices, and are available for appointment as liquidators.

Contact our team

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Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland