Advantages and Disadvantages of Liquidation

What are the Advantages of liquidation

Understanding the advantages of liquidation is crucial for ensuring you make the right decision for your company when it matters most.

This helpful guide will tell you all about the key advantages of liquidation. But, first, we will take a look at the different types of liquidation.

What is liquidation?

Liquidation is a process that facilitates the closure of companies and apportioning of assets via agreement or litigation. 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 and you involve your creditors in the liquidation process.
• Compulsory liquidation: Your company is no longer able to pay its debts (often with creditors chasing significant late payments) 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.

This article will focus primarily on the advantages of liquidation in relation to the creditors’ voluntary liquidation model.

What are the advantages?

These are the most beneficial advantages of liquidation you are likely to see should this become the best option for your company:

1) Minimise debt repayments

Among the biggest advantages of liquidation is the fact that your debts will be largely written off (except in certain circumstances).

You’ll still need to cover the cost of your company’s ‘Statement of Affairs’ and creditors’ meeting.

However, all subsequent liquidation costs (including debt/outstanding creditor repayments) will be met through the sale of company assets. This generally makes liquidation a cost-effective option.

Any redundancy or restructuring costs will be administered by your insolvency practitioner. They will take responsibility for staff redundancies and related payments, as well as cancelling any leases or other long-term liabilities.

Unless you’ve given personal guarantees or have drawn director’s loans, these debts needn’t be settled by you or your shareholders.

2) Cancel your lease arrangements

Not only will you minimise any debt repayments you have accrued to-date, you can prevent any further payments going forward.

Typically, any lease or hire purchase agreements will be terminated when you liquidate your company. This means you are no longer liable for any subsequent payments that may have comprised part of your original arrangement.

If you owe any arrears to leasing company creditors, they may be able to claim this amount back from your appointed insolvency partners.

3) End the legal action

Entering liquidation enables you to bring an end to the prospect of legal action and focus your efforts elsewhere.

Unless you have some form of personal liability for company debt, your creditors will not be able to initiate court proceedings against you.

You can therefore show that your company was closed due to voluntary action, rather than forced to close due to disgruntled creditors petitioning you through the courts.

4) Enable staff to claim redundancy pay

Lastly, your staff will be able to claim redundancy pay, uncollected wages and outstanding holiday pay.

Your insolvency partners will take the lead in terms of making staff redundant. These staff members can then claim redundancy pay, which will be settled using proceeds from the sale of company assets

Even if this is not sufficient to cover all redundancy pay, employees can then claim from the National Insurance Fund.

As a director you can claim redundancy as well through the government if, and it is a big if, you paid yourself via PAYE at a reasonable rate, you do not owe the company money, and there is some sort of employment contract.  It is quick and easy to apply for redundancy in this way and there is no need to employ an outside consultant.

With all these critical aspects legally resolved, you can focus your attention on your next venture. In the end, the ability to make a fresh start is the most fundamental of all of the advantages of liquidation.

What are the Disadvantages?

Investigation into Directors Conduct

As is common with any sort of terminal insolvency the liquidator is obliged to look into the conduct of the directors.  They will look to see evidence of wrongful trading, misfeasance, fraud etc.  Ultimately, they are tasked with reporting to creditors why the company has gone bust and to ensure that bad directors face sanctions.  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

It is quite common for lenders and suppliers to ask for personal guarantees on loans or goods in the event of company failure.  When a company goes into liquidation any directors personal guarantees do not die with the company.

Overdrawn Directors Loan Accounts Need To Be Repaid

If you owe the company money in any way, via a loan, or you have withdrawn dividends when the company was not making a profit then you may be liable to pay the money back.  In liquidation any money owed to it will be seen as an asset and the liquidator will attempt to recover it.  Liquidators tend to take quite tough line on this as it is often the only asset the company has left in liquidation.  The creditors will want to see this chased as much as possible.

Cannot Reuse Same or Similar Name

Once a company is liquidated then you cannot set up a new company with the same or similar name.  This is covered by section 216 of the Insolvency Act 1986. The idea is that you must not create confusion for creditors of the old company.  You may be able to use the name if you buy it off the liquidator or get permission from the court.  This is a complex area of law and you should refer to our page on reusing a company name