Liquidation: Understanding the Disadvantages

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Updated: 12th June 2021

The Disadvantages for Directors in Liquidating Your Company

A voluntary liquidation can take the form of a Creditors’ Voluntary Liquidation (CVL) which is a mutual agreement between shareholders to voluntarily liquidate the business.

Liquidation is a formal insolvency procedure in which a company is brought to an end; all of its assets are liquidated and the proceeds from the sale of assets is used to repay creditors. There are two main types of liquidations for insolvent companies– compulsory liquidation and creditor’s voluntary liquidation (CVL).

In a compulsory liquidation the company is wound up by one of its creditors or HMRC after failing to pay a debt of more than £750. A creditors’ voluntary liquidation takes place when the directors purposefully choose to liquidate the company. Although liquidating voluntarily offers a number of advantages, it is important that you also consider the following disadvantages of both forms of liquidation:

  • Additional Expenses
  • Loss of Brand Recognition
  • Facing a Post-Liquidation Investigation
  • The Possibility of Being Held Personally Liable

Additional Expenses

Liquidating your company voluntarily is more expensive for the directors initially (as they might be asked for a fee) rather than waiting for a creditor or HMRC to force the company into compulsory liquidation. In a compulsory liquidation the cost of issuing a winding up petition (roughly £1,490-£1,990) is covered by the creditor. Furthermore, the liquidator is appointed by the Court or the creditor. In a voluntary liquidation, these expenses, along with the cost of appointing an insolvency practitioner, are all covered by the directors.  The up front cost of a typical CVL usually ranges from £3000 to £7000, depending on the insolvency practitioner’s rates and the amount of work involved. However you should be aware that if the company's assets are sufficient to meet these up front costs then the directors should not have to make a personal contribution.

The Disadvantages of Liquidation

Loss of Brand Recognition

After the company ceases trading and is liquidated all brand recognition will be lost, so all marketing efforts in the history of the company will have been in vain. If you add up the wasted advertising expenditure, it becomes clear that ending the company is more costly than expected. For this reason a CVL should be considered as a last resort, only after alternative options that would allow the company to continue trading have been examined (i.e. – pre-pack administration, company voluntary arrangement (CVA), or asset financing)

Facing a Post-Liquidation Investigation

After every liquidation process the liquidator is required to investigate all actions taken by the directors while the company was trading insolvent. If it can be shown that the directors did not act in the best interests of creditors then they may be accused of wrongful trading. Any director found guilty of this could be banned from acting as the director of any limited company for up to 15 years after the liquidation. If you’re considering liquidation as an easy way to avoid the responsibility of repaying debt, you may want to look into other options, as you could be putting yourself at risk.

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The Possibility of Being Held Personally Liable

Sometimes company directors will pursue a voluntary liquidation because “there isn’t enough money to repay all of the debt” or “rescuing the company will be too costly.” While these may seem to be legitimate justifications, the fact still remains that directors are legally obligated to act in the best interests of creditors as a whole. Obviously, hastily ending a company through a CVL is not in the best interest of creditors, as most of the time it results in debts going unpaid. If it can be shown that the directors used liquidation with the sole intention of deliberately not repaying creditors, they may be held personally liable for the company debts.

Contact us to arrange a free consultation and find out how we can help you with the liquidation process. We can also assess your situation and recommend an alternative course of action if you’re interested in keeping the company in business. We have an extensive network of 100 offices offering confidential director support across the UK.

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