A limited company is a separate legal entity. For example, if you are the director then you might think of the company as being a direct reflection of you, but this is not the case. A limited company can be bought or sold, or stop trading and close completely without having any effect upon you. You can carry on in business and start a new limited company even after being the director of a limited company that has gone into liquidation.
There are three types of liquidation. These are:
The first two types of liquidation can happen because the company is insolvent which means that the company’s liabilities exceed its assets, or is unable to pay its debts as they fall due.
A Creditors Voluntary Liquidation means that the directors have chosen to place the company into liquidation. To do this they have to choose a Licensed Insolvency Practitioner like Kirks Insolvency, who is authorised by the Institute of Chartered Accountants in England and Wales.
Compulsory Liquidation is where a company is forced into liquidation by a creditor owed more than £750. It is advisable to try and avoid this type of liquidation if possible, as you won’t be able to choose your liquidator, it could cost you more money and your company bank account will be frozen two weeks before liquidation.
A Members Voluntary Liquidation is utilised to save tax. It is used where the business has assets above £25,000 and has stopped trading its business. For example, where the business has been sold and the company is just a cash shell. The money can then be distributed to the shareholders who can usually claim Entrepreneurs relief and just pay 10% capital gains tax.
What does liquidation mean for your business?
The business is the trade within the limited company. If the company goes into liquidation all bank accounts are frozen and the company must stop trading. As a director you become virtually powerless to do anything, as the company and the business within it are controlled by the liquidator.
The liquidators aim is to realise all the assets, and this might include selling any business so he can pay back the creditors either all or some of what they are owed. In some cases creditors may not receive anything at all.
The liquidator of an insolvent company also has a duty to investigate what went wrong and file a report with the Department for Business Innovation and Skills. In some cases this may have repercussions for the directors where there was misconduct in running the business, while in others directors can face a disqualification from acting as a director again for up to 15 years.
As a director of that company you can offer to buy back some or all of the assets including the business. You might do this because you want to start again, but perhaps on a smaller scale than before.
Liquidation and whether it is a good or bad solution depends on your circumstances. You should always take professional advice before making a decision. For a free consultation or to talk to our insolvency experts, why not contact us today?