Liquidation is a very useful way of wrapping up a limited company that is no longer able to trade due to its debts. It should not be used where the company is solvent, or when the business in the limited company can be restructured or saved (administration or a CVA is usually a better option if this is the case). Read on to learn why a business might need to enter liquidation, and a list of the advantages and disadvantages of doing so.
Advantages of liquidating a business
- It brings matters to an end for an insolvent business struggling to cope, in a legal and organised manner.
- if the business is under pressure from creditors, the business can be closed and all creditors will be dealt with by the appointed insolvency practitioner.
- It removes the responsibility from the business owners and directors.
- You’ll no longer need to file annual accounts, VAT accounts or tax returns once the liquidation has been completed.
- Employees will be able to make a claim for any unpaid salary, holiday pay, notice pay and redundancy from the government fund. However, this is subject to predefined limits.
- The directors can find other employment or start another business to minimise their personal financial impact.
- A qualified insolvency practitioner can take over the business and make decisions on behalf of the directors.
- The responsibility of the directors to deal with creditors can be removed, although any creditors which have been guaranteed personally will be unaffected.
- Any county court judgements or debt recovery pressure will be lifted, not including any personal debts of the directors.
- HM Revenue & Customs will no longer be chasing the directors for PAYE or VAT payments, if they are due.
Reasons against using liquidation
Liquidation also has its disadvantages, including;
- The business will no longer be able to trade and will be restricted from using the same or similar company name again in the future.
- Any employees will lose their jobs and may not wish to work for the directors any longer.
- Suppliers and creditors may lose money, which can make starting a similar business difficult for the directors.
- Once the liquidation process starts, the business can not be saved and will no longer be allowed to legally trade.
- Any business reputation, trading licences or other valuable assets will be lost.
- The initial process can take up to two weeks to complete, however the liquidation may not be complete until much longer, so is much slower than administration.
- Any accumulated losses for tax purposes will be lost and can’t be recovered.
- Any personally guaranteed debts, to a bank for example, will still be in effect and directors will need to make additional arrangements to avoid these.
- A business liquidation doesn’t usually affect the credit score of the company directors, however the information will continue to be available on Companies House.
Why do businesses go into Liquidation?
- If the business cannot pay the debts as they fall due.
- Business liabilities exceed total assets.
- The business is making losses and you don’t think you can turn the situation around.
- The directors are finding it hard to cope with the stress and pressure of trading.
- The directors are worried that trading is in decline and you will be liable for wrongful trading if you carry on.
- The directors would like someone else to deal with the creditors and all their claims.
Employees owed redundancy, unpaid salary or holiday pay and notice pay can claim this from the government RPO fund. Directors can usually claim this as well.
A Word of Advice
Insolvency is a legal mine field. If you are in doubt, seek good legal advice from a qualified and experienced solicitor who specialises in insolvency or a licensed insolvency practitioner like our firm. Avoid unlicensed debt advisors whose incentive may not necessarily be to help you.