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.

While liquidation is never the ideal situation for a limited company director to find themselves in, for some it is the most appropriate way of dealing with company insolvency and minimising the losses to outstanding creditors. 

What are the advantages of a CVL for insolvent companies?

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 a CVL offers a way of dealing with these outstanding obligations in a way which aims to maximise returns for creditors. 

Unless personal guarantees have been given for company debts, as a director you have no legal liability to repay monies owed by the business. Upon the company entering liquidation, any personal guarantees which have been given will crystallise and the responsibility for paying these associated borrowings will belong to the director/guarantor.

Legal action is halted

Any legal action against the company is stopped when the company is in liquidation. 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, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realised from the sale of company assets 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, unpaid wages and holiday pay should the company not be able to do so using its own funds.

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. It is worth noting here that personal guarantees are often given upon signing a property lease agreement; you should check your documentation carefully so you know whether you are likely to be made personally responsible for the remainder of the lease. 

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 as long as these are sufficient.

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 result of 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.

DISADVANTAGES 

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

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

As liquidation bring about the end of a company, any staff employed by the business will be made redundant and be forced to look for employment elsewhere. However, depending on their length of service with the business, they may be able to claim statutory redundancy pay following their dismissal.