If you spend any time at all reading the business pages or browsing the various forums on the web, then you can’t have missed liquidation being put forward as a neat way to finish a business and start again. But is it really that easy to simply walk away from failure and get back on the horse?
There are a number of pros and cons to winding up a company that you may not be aware of and as always you need to make sure you have taken proper advice about your specific situation before making a decision. Here we present some of the positive aspects of a company liquidation and this short guide is designed to be read with part 2 – ‘Company Liquidation – the downside’.
Sometimes, for whatever reason it becomes clear that a business is simply not viable. It may be that the business landscape has changed, there may be a failure of a major creditor or it just isn’t in the owners’ long term plans, so winding up is the logical step to take.
The first thing to say is that winding up is not always due to distress. A company may change its operating model and wish to move out of a particular sector and, rather than sell out to a competitor may run down a business in a structured and orderly way, liquidate any remaining assets, pay off the creditors and then go through the dissolution process. This has to be done in a specific order and there are clear steps that need to be taken to move through this process. It is not massively onerous but it really is important to get the bureaucratic steps done correctly to ensure the right outcome. A company in liquidation isn’t always insolvent.
Liquidation happens to the company and not the individuals. It’s one of the main reasons for incorporating in the first place and so if a series of unfortunate events have happened and there is no way forward then the directors of the firm can continue on in business elsewhere. Liquidation is also company specific. A winding up may happen to one or more members of a group allowing the other companies in the organisation to continue unaffected.
In a compulsory liquidation the creditors will pay the costs as opposed to the business and so there is in general no cash concerns and once in the process of liquidation the firms’ creditors must deal with the appointed liquidator and not the directors. No further enforcement action can be taken to chase debts due and this can be a great relief as it reduces the inevitable stress involved in the situation.
It is possible to buy the good parts of the business out of the bad. If debts and obligations are dragging back what is in effect a sound trading business then it may be that the directors or other stakeholders choose to buy the good parts to ensure continued trading and employment. So called ‘Phoenix’ or ‘Pre packs’ can be a useful way of ensuring that not everything is a total loss.
Once in liquidation, company directors cannot then be accused of trading whilst insolvent. This doesn’t of course abrogate any responsibility for former actions but does mean that a line can be drawn and directors can show that they have acted properly and in a timely manner.
The benefits of liquidation don’t just extend to directors however. Creditors can also be sure that a firm can be stopped from trading and that the liquidator will investigate the affairs of the company and ensure that those conducting business have done so legally and in good faith. If not then there are remedies that may allow them to recoup some of their losses. Similarly directors that have acted illegally can be barred from holding office for a period thus protecting society generally from rogue trading.
Finally a liquidation will ensure that creditors can get at least some of their money back. The goods and assets of the company will be sold and what remains divided up amongst the creditors in a clear and open way. Although it would be highly unusual for all creditors to get all of their debt paid, they can have at least the small comfort of knowing that the situation has been dealt with fairly and equitably.
Liquidating a company is often the last course of action a group of creditors can take to get some satisfaction of their debts. It is not to be taken lightly. In the same vein a voluntary liquidation is a drastic step to take when looking to get out of a bad situation. It is vitally important that directors take proper, qualified and experienced advice from insolvency practitioners to ensure that they protect themselves in the case of a winding up.
For further information please read part 2 of this article – ‘Liquidation – the downside’.
You can also find out more about insolvency in the UK at the Governments’ own mini site here