In part 2 of our article looking at the Pros and Cons of liquidation we look at the less positive aspects encountered in the process.
For smaller business owners it can be difficult to separate the limited liability company from their own affairs and so it seems strange to note that, in the case of liquidation, assets owned by that firm will need to be purchased by the former user. As an example we can see that a director may have been using a company car as their sole family vehicle but once in the liquidation process would have to buy it back from the liquidator to continue to use it. This is also the case with premises and machinery so it can be difficult for someone who made their living in a very small company to continue in the same way.
The process can also take some while and it is fair to say for many people this can be a difficult and stressful time. Whilst it is true that the debts attach to the company and not the individual, the personal feelings of failure and shame can be difficult to cope with. It is easy to sit and think about what might have been or feel that you should have somehow ‘muddled through’.
Part of the duties of the liquidator is to make a full and complete investigation of the affairs of the company. This of course can be difficult and examining things in hindsight may feel accusatory. Directors who have acted properly and in a timely fashion have nothing to fear of course and the investigation should conclude with no further action but for those who have been negligent (or worse) then action could indeed follow.
Directors wishing to start up business again will need to start up a new company. Sometimes this will be a brand new start with a new trade name and maybe in a different line of business. However there can be a significant amount of ill will on behalf of potential suppliers when a ‘phoenix’ style company begins trading the very next day, in the same location with almost the same name. Whilst legally the new company is an entirely different entity, from a trading point of view it is as well to remember that in practice relationships with former creditors can be frosty to say the least!
When a company gets into difficulty the official receiver can choose to run the firm as a going concern in the hope of saving value for the creditors. This can have the effect of saving jobs and ensuring that a worthwhile company can carry on. When in liquidation though a company with no hope of returning value will be shut down with immediate effect with the resultant loss of employment.
The liquidation procedure takes time and costs money. Creditors should always think carefully about moving towards compulsory winding up as it is highly unlikely that they will get full value for what they are owed. In any event it may be many months before a resolution is reached and cash is actually paid over to the people it is owed to.
Most company directors can find someone with a great war story to tell about the time they closed a company one day and opened up the next freeing them from debt with no negative implications whatsoever. The internet is a breeding ground for such yarns. However every situation is different and it is really important that directors and creditors get facts from experienced, professional advisors before taking any action that could have unintended consequences.
The information we have provided here is very general in nature and if you would like to know more or talk about your particular situation then please do get in touch.
You can also find out more about the insolvency service here