What are The Advantages and Disadvantages of Liquidation?

What is Liquidation?

Liquidation is the name for the process which involves closing down a limited company, realising its assets and distributing the funds to its creditors.

There are many reasons a business might liquidate, business insolvency being the most common, but companies which are solvent may also liquidate for a variety of reasons. Solvent liquidation (members voluntary liquidation – MVL) and insolvent liquidation (creditor’s voluntary liquidation – CVL) differ only that in the latter case, there won’t be money left over to pay to shareholders and all the creditors may not be paid what they are owed from the liquidated assets.

What are the Advantages of Liquidation?

There are a number for reasons why liquidation is a positive choice for business owners and creditors alike.

• One of the most advantageous aspects of liquidation is the finality it brings. Once liquidated, the business ceases to exist. The annual statutory paperwork required of any Limited Company ceases to be required, all bills invoices and debts will cease to be owed one way or another, and the directors of the company no longer have the responsibilityof running the company.
• Once the process of liquidation is started, a licensed Insolvency Practitioner will take over the running of the business and manage the winding up process. They will arrange for the business to cease trading, for its assets to be sold and creditors paid as much as is possible depending on the circumstances.
• In the case of a CVL, the directors will be relieved of the pressure of managing a failing business and al that stress that can arise from having to deal with creditors demanding payment.
• An MVL can be a tax efficient way for the shareholders to get a distribution from the assets of the company

What are the Disadvantages of Liquidation?

As with any insolvency process, liquidation has aspects which aren’t so advantageous. In order to decide whether it’s the right option, it’s important to be aware of both the advantages and disadvantages of liquidation.

• Debts which have been personally guaranteed by company directors survive the liquidation and creditors will be able to pursue the directors for them personally.
• If there is an overdrawn director’s loans account, the directors will be pursued for this as part of the company’s assets to be liquidated. The same applies to dividends that may have been taken when there were insufficient profits to justify their payment.
• The liquidation procedure, once started, cannot be stopped. This means that the business must stop trading and the assets realised.
• People who work for the company, as well as those who supply the business, will lose their jobs or lose their customer respectively. In the case of insolvent liquidation, this may leave employees and suppliers out of pocket.
• If the company is put into creditors voluntary liquidation then there are legal restrictions on the directors regarding the use of the name of the company. They cannot use the name, or a similar one, of the insolvent company except in certain clearly defined circumstances.
• If a new company is started it is often hard to get credit from suppliers and banks.
• When a business is liquidated, part of the liquidation procedure is an investigation into the conduct of the directors and the factors which led to the liquidation. Directors who have done nothing wrong have little to fear, but it can be a stressful process. Directors who have behaved improperly, may find themselves subject to disqualification from acting as a director and may face legal proceedings started by a liquidator to recover monies.

Be Clear About the Advantages and Disadvantages of Liquidation

It is important to be clear about the advantages and disadvantages of liquidation before the process begins.

For solvent companies, the choice might be made to liquidate for a number of reasons. For example, the company may have come to the end of its useful life or the Directors may wish to retire and there is no one able to take their place.

For insolvent companies, on consideration of the advantages and disadvantages of liquidation, it might be worth considering business recovery options if they’re still available instead.

If you’re considering liquidating your company, why not contact us and take advantage of our free consultation? We can discuss your options and reassure you that you’re either taking the best option for you in your circumstances or suggest some alternatives which you may not have considered.

Speak to us, we can help.