Understanding the advantages of liquidation is crucial for ensuring you make the right decision for your company when it matters most. This guide will tell you all about the key advantages and disadvantages of liquidation.
Liquidation is the official insolvency process of bringing a company to an end. The company is required to stop trading and any business assets will be sold to pay creditors what they are owed.
There are three types of liquidation:
Creditors’ voluntary liquidation (CVL):
The most common form of liquidation, CVL happens when your company can no longer pay its debts. This article will focus primarily on CVL.
Compulsory liquidation:
Your company is no longer able to pay its debts, and an application is made to court for the liquidation of the company.
Members’ voluntary liquidation (MVL):
Your company is able to settle the debts currently in place, however you still want to close it.
These are the most beneficial advantages you are likely to see should a CVL become the best option for your company.
Minimise Debt Repayments: Your debts will be largely written off (except in certain circumstances). Liquidation costs will be met through the sale of company assets. Unless you’ve given personal guarantees or have drawn director’s loans, these debts needn’t be settled by you or your shareholders.
Cancel Lease Arrangements: You can prevent any further payments on lease or hire purchase agreements, as they are typically terminated when you liquidate your company.
End the Legal Action: Entering liquidation enables you to bring an end to the prospect of legal action from your creditors.
Enable Staff to Claim Redundancy Pay: Your staff will be able to claim redundancy pay, uncollected wages and outstanding holiday pay. As a director, you can claim redundancy as well if you paid yourself via PAYE, do not owe the company money, and have an employment contract.
Investigation into Director’s Conduct: The liquidator is obliged to look into the conduct of the directors. They will look for evidence of wrongful trading, misfeasance, fraud, etc. Of course, if you have not done anything that would be deemed as “dodgy” or extremely incompetent, then you have nothing to worry about.
Personal Guarantees May Be Called In: When a company goes into liquidation, any personal guarantees you have given do not die with the company.
Overdrawn Director’s Loan Accounts Need to Be Repaid: If you owe the company money, the liquidator will attempt to recover it. They tend to take a quite tough line on this as it is often the only asset the company has left.
Cannot Reuse Same or Similar Name: Once a company is liquidated, you cannot set up a new company with the same or similar name. This is covered by section 216 of the Insolvency Act 1986.
With all these critical aspects legally resolved, you can focus your attention on your next venture. The ability to make a fresh start is the most fundamental of all the advantages of liquidation.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT KSA Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
