The advantages and disadvantages of liquidation
The most common type of liquidation is a Creditors’ Voluntary Liquidation (CVL). This is a formal insolvency process that’s taken by the directors of a company. The advantage of liquidation as a CVL is that it’s voluntary, as suggested by the name.
It’s also possible for a compulsory liquidation to be sought by your creditors. The disadvantage of liquidation in this form is that, if approved in court, liquidation is forced upon you. This is less common and can be avoided if you act before it’s too late.
The advantages of liquidation
No legal action
As we said above, one of the biggest advantages of liquidation through a CVL is that the directors of a company choose to go through the process. Once you’ve taken this step, a licensed insolvency practitioner will take charge of the CVL for you.
If you’re threatened with a winding-up petition (which is the first stage of a Compulsory Liquidation) by your creditors, you can still initiate a CVL and avoid compulsory liquidation. A CVL will stop any legal action from being taken against you by your creditors.
No more pressure from creditors
Outstanding debts are often the biggest point of stress for directors and owners of insolvent companies. With no way of paying your creditors, it can often seem like an impossible situation to escape from.
One of the advantages of liquidation through a CVL is that your company’s creditors are paid back as much as possible as part of the process, with any outstanding company debts being written off. This includes HMRC and your landlord. It’s important to note that any personal guarantees on the lease of your company’s premises or equipment will still be valid. It’s the responsibility of the guarantor to honor this agreement.
It protects your employees
Your company’s assets will be sold as part of the CVL process, to free up funds to pay your employees and creditors. If there’s not enough money to cover your employee costs, one of the advantages of liquidation is that they can make claims to the government for outstanding salary, holiday pay and redundancy. Not everyone is entitled to every payment. Factors like length of service will be considered.
The cost of the liquidation is covered
Your licensed insolvency practitioner will oversee the sale of your assets, liaise with creditors and deal with the paperwork for one, fixed fee, which is one of the advantages of liquidation by a CVL. Any additional costs can be paid for from the sale of your company assets.
The disadvantages of liquidation
Directors’ conduct will be looked at
It’s likely that the directors of your company have always acted in good faith. However, one of the disadvantages of liquidation is that your licensed insolvency practitioner will have to investigate their conduct as part of the liquidation process. If there’s evidence of misconduct and the directors concerned are prosecuted, they will face a director’s disqualification.
The results of a director’s disqualification mean being banned from setting up, marketing or being involved in the running of a company (as a director or otherwise), plus potential fines and jail time.
Directors must pay back the company
Another of the disadvantages of liquidation for directors is that company overdrafts, credit cards or loans from the company must be paid back before the company can be liquidated. If they cannot pay the money back, the directors concerned could be forced into bankruptcy.
Your employees will be made redundant
Often the most difficult part – and for many the biggest of the disadvantages of liquidation – is saying goodbye to your employees. Especially if you’ve worked together for a number of years. The benefit of going through a liquidation process like a CVL is that, as we’ve said above, your employees will be able to claim payments related to their employment from the government (if eligible).
Complete closure of your company
As part of the CVL process, all the assets associated with your business will be sold to pay back your creditors. You’ll be struck off the register at Companies House and a notice of your liquidation will be made by The Gazette. Unless this process is undertaken very carefully, through a process such as Start Afresh Liquidation, you will not be able to restart your business under the same company name.
Because all liquidations are made public, one of the disadvantages of liquidation is that it can become public knowledge.
How Liquidation.co.uk can advise you on the advantages and disadvantages of liquidation.
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Don’t forget that if your business can be saved, whether within your existing company or through a new company, we can explain the process and options for this as well!
Q. What is insolvency?
An insolvent company is a company that cannot pay its debts now and in the long-term. Insolvency is most commonly the result of:
- Lack of cash coming into the business
- Poor cash-flow and p&l forecasting
- Directors drawing on company funds
- Unmanageable debt
- Lack of direction in the business
- Too much competition
- Relying on a single customer or source of income
One of the advantages of liquidation is that it relieves the stress of facing these insolvency challenges.
Q. What’s a Creditors’ Voluntary Liquidation (CVL)?
A Creditors’ Voluntary Liquidation (CVL) is a formal liquidation process. It’s used to close a company that’s in an insolvent position and has no potential of recovering. The purpose of a CVL is to sell any assets and use the cash to pay back its debts, before closing the company.
Q. What does winding up mean?
‘Winding up’ is another way to say finishing the affairs of a company and closing it. If you have an insolvent company, it most often refers to the company going through a formal insolvency process to close – such as a CVL. You can also wind up a solvent company using a process called a Member’s Voluntary Liquidation (MVL).
Q. What is a winding-up petition?
A winding-up petition is a formal request made by creditors to the courts, to ask them to force a debtor company to be liquidated and its assets sold to pay back outstanding debts. If the petition is successful, the debtor has no choice but to be liquidated. This is called Compulsory Liquidation.
A winding-up petition is usually the result of the debtor company’s directors burying their heads in the sand and ignoring their insolvent position. Contacting a licensed insolvency practitioner when a company is struggling is the best way to avoid receiving a winding-up petition.
Q. What is a Director’s Disqualification?
A Director’s Disqualification can happen when a director fails to meet their legal requirements and obligations. Activities that can lead to a Director’s Disqualification include:
- Trading while knowingly insolvent (wrongful trading).
- Failure to keep proper accounts and records.
- Failure to pay tax owed to HMRC.
- Failure to file accounts and returns to Companies House.
- Using company money for personal profit.
- Any criminal activity such as fraud and breaking health and safety regulations.
There are serious legal consequences in addition to being disqualified as a director. These could include a prison sentence.
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