Advantages and Disadvantages of Liquidating a Company

When liquidating a limited company there are several factors to consider and it’s a good idea to be aware of its merits before you proceed. Companies may either choose to liquidate voluntarily, or be forced into compulsory liquidation from creditor pressure, or financial circumstance. This article will cover all of the advantages and disadvantages of the liquidation procedures.

Whatever situation is provoking you to think about liquidating your company, however, you should be aware that it is a very serious process. We suggest you take professional advice at the earliest opportunity.

Advantages and Disadvantages of Liquidating a Limited Company

Advantages of Liquidating a Limited Company

No More Debts

For company directors, the pressure of mounting debt can become overwhelming and extremely stressful, after the debts fall due. One of the immediate advantages to voluntary liquidation is that, once the company has been dissolved and the sale of its assets distributed to creditors, any remaining unsecured business liabilities that are not personally guaranteed will be written off. Outside of personally guaranteed debts, this will free directors from the pressure of repayment and allow them to move on to new ventures if they wish. 

An end to Legal action

Legal action against companies is halted after liquidating a business which is another benefit. Once the liquidation has been carried out, the removal of any legal pressure is often a welcome situation which could enable directors to seek business opportunities in other areas, depending on the circumstances of the liquidation itself. If the primary reason for considering liquidating your company is protection from creditors, you may want to consider other options that may be appropriate such as administration.

Relatively low one-off Cost

Aside from the initial cost of arranging a statement of affairs, liquidations generally require little cash flow to undertake since the insolvency practitioners take their fees from monies recovered from the sale of the assets. Often the amount for liquidating the company is far lower than the amount of debt.

Staff can Claim Redundancy pay

Although the appointed liquidator will make any existing staff redundant, there are measures in place to ensure they get paid. Whether a company has been compulsorily liquidated or has chosen voluntary liquidation, employees are legally entitled to claim wages arrears, holiday pay or redundancy pay from the redundancy payments office (RPO) if the liquidation sale does not cover everything.

Leases can be Cancelled

Terms on lease and hire purchase agreements are generally terminated at the date of liquidating the company, 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.

Alleviated Pressure from Creditors 

It is common for HMRC to be in the list of creditors for tax debts including VAT, Corporation Tax and PAYE and directors can often feel intimidated in situations. Part of the job description of the licensed insolvency practitioner involves communicating directly with the creditors on behalf of the company’s estate. This can be a huge relief for directors who have been receiving threatening letters and angry phone calls. 

Advantages for Company Directors

For company directors, a creditors’ voluntary liquidation is often chosen in order to avoid compulsory liquidation. The voluntary liquidation process gives company directors more control over the course of events, and because CVL’s are done under professional guidance there is less chance of taking action that could lead to wrongful trading accusations. Creditors’ voluntary liquidation may also be a way of preventing aggressive creditor threats such as a winding up petition, and the frozen bank accounts that accompany this. If you believe that your company may be insolvent or near to insolvency, we strongly suggest that you act quickly and talk to us before the unpaid liabilities cause threats of compulsory liquidation against your insolvent company.

In the case where your company has no debts and is a solvent business, a Members’ Voluntary Liquidation may be more appropriate as there are other benefits to that procedure such as a reduced rate of tax via entrepreneurs’ relief.

There may also be other options available to your company such as a company voluntary arrangement (CVA), or pre-pack administration, depending on the circumstances.

Advantages for Creditors

Company insolvency means that the legal duty of directors is no longer to shareholders, but to the creditors. The appointed liquidator also has a legal mandate to extract as much money possible from the assets of the company in order to pay the creditors.

Communication should also improve. Where creditors have chased long-term debts after failed negotiations and have heard little from the debtor, an official insolvency procedure brings with it a well structured and organised communication process. When the company has been struck off the registrar at Companies House, the liquidation is advertised in the London Gazette, it will also list the office of the insolvency practitioner handling the case and this will be a point of contact to find out what is going on.

Disadvantages of Liquidation

Company Assets will be Sold

Everything owned by the limited company from property to vehicles and machinery will be sold to pay the creditors.

Directors will have to pay Personal Guarantees

If a director has signed a personal guarantee clause in a finance agreement, liquidating your company will lead to these being called in. Although there is usually a clear distinction between corporate and personal debt, the personal guarantee clauses are specifically designed to penetrate the corporate veil. A classic example of this is where a director has used their house as collateral for a business loan. In some of the worst circumstances this may lead to bankruptcy. Please take the time to seek professional help at your earliest convenience.

Potential Accusations of Wrongful Trading

Once the insolvency practitioner (IP) has started to liquidate the company they have a duty to investigate the conduct of the company’s directors in the period preceding the insolvency. Where it is found that a director knew the company was insolvent and did not put the interests of the creditors first, there is the possibility for charges of wrongful trading.

Directors’ Loan Accounts must be Repaid

During liquidation, it is the liquidators job to collect any money owed to the company, which may include money owed from an overdrawn directors’ loan account. Where a director owes money this will be treated exactly the same as any other debt of the company and need to be repaid. Where a director cannot repay the loan, there is sometimes the possibility of negotiating a lower repayment amount, but this depends upon the particular case.

All Employees will be made redundant

Since liquidating a limited company involves the end of the firm in its entirety, this also includes all employees. Where directors have built a successful, close-knit and loyal workforce this can be one of the most painful aspects of insolvency proceedings.

For a free confidential meeting to discuss liquidating a company please contact us on either 08000 746 757, or use the live chat feature and we will be happy to take you through your options.

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