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Disadvantages of Liquidation

8th October, 2021
Robert Moore

Written ByRobert Moore

Marketing Manager


Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.

Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.

Robert Moore
  • What is liquidation?
  • What are the disadvantages of liquidation?

If you can understand the disadvantages liquidation has, this can prevent you from making poor decisions which cost, especially in already unfavourable environments.

This helpful guide will explain these disadvantages to you. But, to begin, we will take a look at the three types of liquidation, and when they are likely to come into play.

What is liquidation?

It is the process which facilitates a companies closure and apportioning of assets, by agreements or litigations.

What are the three types?

  • Creditors’ voluntary liquidation (CVL): The most common type. It occurs when your company can no longer pay its debts and   you involve your creditors in the liquidation process.
  • Compulsory liquidation: Your company cannot pay its debts (often with creditors chasing significant late payments) and an application is made to court for the company to be liquidated.
  • Members’ voluntary liquidation (MVL): Your company can settle the current debts, however you still wish to close it.

What are the disadvantages of liquidation?

1. Some payments may still remain

Liquidation is generally a cost-effective option that will prevent you from having to make further payments.

However, there are some instances where you will still be held liable for settling outstanding amounts:

Personal guarantees

If you’ve given personal guarantees to creditors regarding company debt repayments, you (or your guarantor) will be held legally liable for settling these amounts.

Director’s loans

Alternatively, if you’ve borrowed money from the company in the form of dividend payments, you’ll need to pay this back.

This is known as an ‘outstanding loan account’. It’s most likely to occur when directors have drawn dividends while the business wasn’t profitable.

Valuable assets will be lost

Though you are likely to be shielded from most costs via liquidation, assets linked to the company will be used to settle your debts.

Company assets

Your company assets will be sold to settle your debts (unless you have a ‘Pre pack‘ agreement in place). Pre pack means your assets will still be sold, but can be bought by a ‘newco’.

Company assets often have more value in combination, when they facilitate an entire process or procedure. When separated, these are likely to offer less value, both in terms of re-use and re-sale.

This means the returns are likely to be much lower than your initial expenditure. And, it means you will not be able to use these assets again for future ventures.


With redundancy, your employees – and their shared expertise – will be split up. This will make it harder to re-establish these skill sets elsewhere. However, you can avoid this by selling part of the business as a going concern.

Tax losses

Any tax losses in the company cannot be used against another company.

3. Director’s conduct investigations

The Insolvency Practitioner will report any proven instances of misconduct to the Insolvency Service.  The insolvency practitioner has a duty to investigate the conduct if they think there has been an instance of malfeasance or fraud on the part of the directors.

This could lead to director disqualification, liability for company debt or even a custodial sentence in extreme circumstances.

With all of these considerations to bear in mind, you should not enter into liquidation lightly. However it should be remembered that liquidation is really the only option for the company if there is no money left to pay creditors.  If the company or directors cannot afford to pay an insolvency practitioner to liquidate the company via a creditors voluntary liquidation then there are two options depending on the size of the debt.  If the debts are small then it may be possible to dissolve the company.  If not, then it is likely that the creditors will seek to wind the company up.  i.e a compulsory liquidation.

The disadvantages of this type of liquidation are as follows;

  • It can take a long time 6-12 months which means that ex employees will not be able to claim redundancy until the process has finished
  • The official receiver has a mandatory duty to investigate the directors conduct, whether or not they have suspicions of malfeasance
  • You will need to go to court
  • It doesn’t look good on your company/personal credit record if someone does an extended credit check.  This is most likely if you are involved in heavily regulated industries or national security.

Worried Director What Will Happen To Me After Liquidation?

in Company Liquidation What is …?

"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director.  If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020.  Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly.  I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim.  This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork".  It isn't worth the risk.  If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP)  or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at 

Worried Director What Will Happen To Me After Liquidation?

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