Four Common Liquidation Myths Debunked

Four Common Liquidation Myths Debunked

It is a fact of life that companies fail. In fact it is estimated that only one in five businesses make it to the five year mark.

With this in mind then it is surprising that so many myths surround the process of company liquidation so to help clear up some misconceptions we’ve detailed a few of the more common ones.

The directors will be disqualified or banned following liquidation

Many successful directors have, in the past, had to liquidate companies and close businesses. Liquidation itself does not negatively affect your ability to direct a company because the law recognises that sometimes things just go wrong.

There are a set of rules that cover the conduct of directors and the only instance you may receive a ban or disqualification is if you do not follow the proper procedure when your business becomes insolvent.

As a director it’s your duty to recognise this, even if you are not an accountant and contact a liquidation professional to get things moving. Once they’re appointed, an investigation will ensue which will review your conduct, and make sure that you acted in the interests of your shareholders and creditors. After liquidation, providing you were honest and up front, you’re free to start another business.

After liquidation, I can’t start another company…

Following on from our first myth the fact is that this couldn’t be further from the truth.

Whilst you may be hard on yourself for letting you business ‘fail’, it’s important to remember that this happens a lot in business, and many directors go on to learn from their mistakes and be extremely successful.

Company liquidation is not necessarily a negative process. It’s a tidy, organised and perfectly respectable way to wrap up a business that isn’t doing too well. In some instances, under strict conditions, you may even be allowed to carry on the name of your business after liquidation – what’s known as a ‘phoenix company’.

I’m going be hassled and chased by creditors…

Liquidation can be a difficult time for you and your employees, even when it’s handled properly, but if any creditors attempted to pursue you directly during the process they’d actually be breaking the law.

Furthermore, once liquidation has finished and you assets have been divided up, and that creditor has received their share, they’re no longer allowed to chase up any remaining debt. That is all they’re able to receive, and the insolvency practitioner has signed off on it.

I can liquidate my own company, right?

This is a very common thought but it’s also a potentially damaging one. Though you might think you’re being sensible in attempting to liquidate your own assets in the wake of insolvency, this process cannot be carried out by a company director.

There are two types of liquidation – Members’ Voluntary Liquidation and Compulsory Liquidation. The former is instigated by the shareholders of a company in light of insolvency, and the other instigated by creditors who have gone unpaid and put in a formal request.

It’s important to remember that both of these practices have to be led by an appointed liquidation practitioner by law. This is usually an official receiver of The Court.

Liquidating a company that is insolvent is a potentially complex process that requires a number of steps to be followed in a strict order and to a requisite level of professionalism.

Although it may be tempting to cut corners or ‘do it yourself’ in fact the sensible option is to get advice from a qualified and experienced insolvency practitioner to protect yourself and your fellow directors.

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