Liquidation of a business is a formal insolvency procedure in which the life of a company is brought to an end in an effort to repay creditors. During liquidation, all of the assets a business owns will be liquidated and the proceeds will be used to pay off creditors.
That’s the case whether a business undergoes compulsory liquidation or a creditor’s voluntary liquidation. A compulsory liquidation is when the company is wound up by one of its creditors or HMRC after failing to pay a debt of more than £750. A creditor’s voluntary liquidation (or members voluntary liquidation) is when the directors of a company choose to liquidate the company.
Though liquidating your company voluntary has a number of advantages like protection from wrongful trading accusations, personal liabilities protection and avoidance of court proceedings, there are a number of downsides for directors. They are:
Liquidating your company voluntarily isn’t free. In fact, it’s more expensive for directors initially than waiting for a creditor of HMRC to force the company into compulsory liquidation.
However, it’s worth noting that if your company’s assets are greater than these costs, the directors shouldn’t have to make a personal contribution.
Potential post-liquidation investigations.
It’s the job of the liquidator to not only rid the company of debts and liquidate their assets, but to investigate the actions taken by directors whilst the company was trading.
If the directors are found to have acted in a way which was not in the best interests of the creditors, they may be accused of wrongful trading. Such a conviction could mean an up-to 15-year ban on acting as director of any limited company. For that reason (and more), it’s not advisable to wind up your company just to avoid paying your debts, which brings us to….
Possibly being help personally liable.
Whilst “there isn’t enough money to repay the debts” and “rescuing the company would cost too much” might seem like legitimate reasons for pursuing a voluntary liquidation, the fact remains that directors are legally obligated to act in the interest of their creditors.
For obvious reasons, winding down a company before it can pay its debts is not in the interests of creditors, as most of the time those debts will go unpaid. If it’s found that directors used liquidation with the sole intention of deliberately avoiding debts, they can be found personally liable for the company debts.
Destruction of your brand.
When a company is liquidated and ceases trading, you’re forbidden from naming a new business after your liquidated one. For companies which have invested heavily in advertising to increase brand recognition, this can be a tough blow to take and one which shouldn’t be done unless it absolutely must.