Understanding the pros and cons of company liquidation

What directors need to know about liquidating a company

If you’ve reached the stage where liquidating your company seems to be the only remaining option – maybe creditor pressure is becoming too much, or the company’s debts are simply not manageable - it may be reassuring to know that you can start again as a director with a new company.

As long as the eligibility criteria are met and the underlying business is viable, a pre pack administration could be the route to a new, more sustainable business. This procedure enables existing directors to purchase some or all of their company’s assets, using them to start again with a ‘newco.’

The limited liability framework – what does this mean in practice?

When a limited company enters insolvency, the directors are protected from personal liability for the debts of the business unless they have provided a personal guarantee, or have failed in their statutory duties as directors.

This business structure separates the financial affairs of a company from its owners/directors, and means that in the main, a shareholder’s liability only extends to the level of their own shareholding.

This limited liability framework allows for you to liquidate your company and move on with a new business if you have done all you can to remedy a dire financial situation. But under what circumstances might this happen?

Your own debtors are not paying their bills on time, and you haven’t been able to collect money in quickly enough.

All of these scenarios can lead to a sudden and unexpected debt spiral, but if the conditions are right, a pre pack administration could be a good solution.

Transparency and pre pack administration

You may be aware that pre pack administration, or ‘phoenixism’ as it is also known, has received some bad publicity in the past. This is largely due to the perception that creditor interests are not met during the process - that creditors appear to be out-of-pocket while directors use their limited liability status to rid themselves of responsibility.

This may be true in some instances, but many ethical issues associated with this procedure have been addressed by the Insolvency Service with the introduction of SIP 16. The Statement of Insolvency Practice 16 requires the insolvency practitioner to state how the decision to use pre pack administration was arrived at, and why it provided the best outcome for creditors over other insolvency routes.

Additionally, if directors are purchasing the assets to set up a new company, full disclosure must be given surrounding certain aspects of this process, including the valuer’s details and qualifications, how the business was marketed, and why it wasn’t traded as a ‘going concern.’

These and other requirements go some way towards addressing the issues around a pre pack sale, so what are the advantages likely to be if your situation makes it a suitable option?

Pros of phoenixism

The main advantage comes from the sheer speed of a pre pack sale. The business is marketed and a price agreed prior to appointing an administrator, who then carries out the sale quickly to minimise disruption to business operations.

And the cons

Apart from the negative general perception mentioned earlier, depending on individual cases, there could be several other disadvantages:

If you want to find out more about the pre pack administration process, and whether your company might be eligible, call one of the team at Real Business Rescue. We have offices nationwide, and can arrange a same-day consultation to clarify your position. We have an extensive network of 78 offices offering confidential director support across the UK.