For most people the phrase ‘company liquidation’ has connotations of failure and ending but surprisingly there can be some very important benefits of liquidating a company.
The first immediate benefit that will be felt by the directors is that any debt collection action will stop. Typically they will have found themselves fielding calls and emails from creditors demanding repayment for some time and once a company goes into the liquidation process these will be directed to the liquidator. This means that the directors should immediately start to have more time to plan their future and far less personal stress.
Carrying on the business of the company when there is no reasonable prospect of the creditors of the firm being paid is called wrongful trading and a director (or a shadow director) can be held to be personally liable for any debts incurred. It’s important to note that this isn’t insolvent trading. The distinction between the two is that an insolvent company may have a realistic prospect of trading out of their temporary difficulties whereas a company trading wrongfully has no prospect of ever being paying back their creditors.
Directors need to ensure that they won’t be held liable by the liquidator or the courts. By putting the company into Voluntary Liquidation quickly the directors can ensure that wrongful trading won’t happen and they can show they have acted in the best interest of any creditors.
Once the liquidation is in process then it is important to remember that the process is happening to the company and not the directors and this has a number of benefits in itself.
Business owners may be well to consider a voluntary liquidation because this means that the directors can ensure that the costs and stress of a creditors compulsory winding up is avoided leaving them clear to move on quickly to new opportunities.
If the company trades wrongfully then it is possible that the court may order that the directors are personally liable for some of the debts run up during this time. By carrying out a properly timed liquidation the directors can ensure that this will not be the case and that they won’t have any personal liability. Having professional advice before and during the process will ensure that the directors don’t take ill-advised decisions that may have unfortunate consequences.
Companies, particularly those trading in distinct groups or areas may have good and bad parts. Some may be profitable and healthy and some may be unprofitable and ailing, thus holding back the group as a whole. The owners of the group may choose to liquidate just a single company in difficulties leaving the group leaner and fitter as a consequence. It may seem that this is an option only available to groups but by using a pre-pack or ‘phoenix’ option owners can also take brands, staff, machinery and customers of a company into a new set up and leave behind debts and unprofitable contracts in a liquidated old firm.
One of the major benefits reported by owners who go through a liquidation is that they are forced to take time to think about their business, career and future direction. Often people that find themselves in a fire fighting situation such as that experienced in a firm in difficulties find it hard to plan ahead for the medium term. This short termism tends to be both inefficient for the company but also highly stressful for the individuals concerned.
Taking professional and qualified advice is vital through the insolvency process and it is important to make the call early on to ensure that you have the right advice at the right time.
Liquidation can have significant upsides for the owners of businesses in distress and getting accurate and timely information can be both effective and reassuring