Advantages and Disadvantages of Company Liquidation
Creditors’ Voluntary Liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due. This is the most common form of liquidation in the UK.
All trading will cease and company assets are sold in order to repay creditors. Secured creditors with a fixed charge generally take preference, followed by insolvency practitioner fees and then ‘ordinary’ creditors or secured creditors with a floating rather than a fixed charge.
In the case of Compulsory Liquidation, a creditor has usually been chasing the company for payment of a significant amount, and on finding themselves unable to collect what is owed, they petition through the courts for the company’s liquidation.
If your company is to be placed into Creditors’ Voluntary Liquidation following professional insolvency advice, there are some benefits to undergoing this procedure even if everything currently seems bleak.
For some directors it can be a blessing to be free from the stresses of dealing with company insolvency, offering them a fresh start to either build another business or follow a career in employment.
Here are a few more advantages of Creditors’ Voluntary Liquidation for companies in insolvency.
Outstanding debts are written off
Being unable to repay existing debts with no way of turning the company around is a stressful situation for any director. You cannot continue to trade if you are insolvent, and Creditors’ Voluntary Liquidation offers an escape route from this ‘no-win’ situation.
Unless personal guarantees have been made for company debts, as a director you have no legal liability to repay monies owed by the business. The opportunity is there to move on and put your efforts into a new enterprise if you so wish, rather than investments being swallowed up by existing debts.
Legal action is halted
Any legal action against the company is stopped on liquidation, leaving you free to explore other business options without being pursued by creditors. Again, as long as you have no personal liability for a company debt, creditors will be unable to take action against you.
Staff can claim redundancy pay
Members of staff will be made redundant by the Liquidator, but can claim redundancy pay from the sale of company assets. If monies realised from the sale are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. The National Insurance Fund pays out for redundancy, uncollected wages and holiday pay, amongst other debts.
Leases can be cancelled
Terms on lease and hire purchase agreements are generally terminated at the date of liquidation, meaning that no further payments need to be made. If any arrears are owed, the company leasing the goods may be able to claim from the insolvency practitioners along with other creditors.
Relatively low costs involved
Company directors will need to fund the costs of arranging a Statement of Affairs and holding a creditors’ meeting, but apart from those upfront costs there may be little to fund, as professional fees are paid from the sale of company assets.
You will need to hire a professional firm of insolvency practitioners to instigate both the Statement of Affairs and the creditors’ meeting. We at Begbies Traynor are available for appointment as Insolvency Practitioners throughout the UK.
Avoid court processes
By voluntarily choosing to liquidate the company, you can avoid being petitioned through the courts and be able to demonstrate to the public that liquidation was a company choice rather than a hostile creditor action.
Having identified some of the advantages of this type of company liquidation, let us now look at the main disadvantages of the process.
Accusations of wrongful trading
On liquidation, the appointed insolvency practitioner is obliged to investigate the conduct of all directors. A detailed report is sent to the Department for Business, Innovation & Skills (BIS), and if a case is successfully brought against one or more directors, they could face severe penalties. These include a ban from acting as a director for up to 15 years, and in serious cases prosecution through the courts and a prison sentence may ensue.
Personal liability for company debts
Becoming personally liable for company debts can happen if a director has made a personal guarantee against debts of the business. A creditor can enforce the debt if they are unable to reach an agreement for repayment.
If it comes to light that the company has been liquidated quickly, with the sole purpose of avoiding debt repayment, directors may be held personally liable for company debts due to their improper actions.
Liability for overdrawn directors’ current accounts
Each director will be held responsible for repayment of their director’s current account should it be overdrawn. The liquidator has the power to force directors to repay this debt if necessary.
All business assets will be sold
There will be no remaining assets with which to start a new business. All existing assets will be sold off in order to provide a dividend to creditors where possible, and for the insolvency practitioner to collect their fee.
All staff will be made redundant
Valued staff will disperse to look for other employment, meaning that any new business will need to be built from scratch with no recourse to inherent knowledge and expertise.