Deciding to close down your company can be a difficult decision, regardless of the reason. In this blog, we explore emotional support during business liquidation and offer guidance for directors.
Why do directors close companies?
There are many reasons why directors decide to close their companies.
Some of the most common reasons include facing financial distress or starting a new venture, although some directors close their companies due to retirement or other reasons. It’s entirely up to you whether you decide to tell people the reasons for the company’s closure, and you should not feel pressured to do so.
Financial difficulties may be clear to your creditors, as they are likely to be struggling to get the money they are owed from you. Being honest about your financial health can help to ease the situation.
Finding the right method of closure
Before a director closes a company, they will need to determine whether the company is solvent or insolvent.
A solvent company can afford to pay its debts off when they fall due. These companies are unlikely to have outstanding debts and should use a member’s voluntary liquidation or a strike-off procedure. A strike-off procedure is only usually successful if the company has no outstanding debts, including unpaid bounce-back loans, as creditors can object.
In contrast, an insolvent company cannot afford to pay its debts when they fall due. In these cases, the company will have more liabilities than it has assets. Sometimes, the company’s assets can be realised (sold) to generate money to pay off the company’s creditors.
Directors with insolvent companies will have to use a creditors’ voluntary liquidation process, which is the most favourable option when in debt. Some directors may also be able to use a company voluntary arrangement (CVA) or a pre-pack administration.
Some company directors fail to fulfil their duties as directors and end up being placed in compulsory liquidation. This does not reflect well on the director and means they will have significantly less control over the situation, including the insolvency practitioner appointed and the timeframe in which the company is closed. The compulsory liquidation process begins with a winding-up order.
Closing a company can feel stressful whichever method you use, but you can definitely lower the stress by acting within your duties, recognising the insolvency and being proactive. If your company is insolvent, a creditors’ voluntary liquidation is the most common choice.
What happens if wrongdoing has occurred?
As a director, you are required to act responsibly. If you have committed wrongdoing, it is vital that you are honest. You should approach this subject with all of the information and not hide anything.
Your insolvency practitioner will ask you about this at the beginning of the process. When you speak with them honestly, you can identify any challenges that you might face and address the worst-case scenario now, rather than later.
While honesty will help demonstrate cooperation and may mitigate some consequences, serious misconduct can still lead to penalties.
Some examples of wrongdoing include fraudulent trading, wrongful trading and making preference payments.
If you are found guilty of wrongdoing in your company, then you might face personal liability for the company’s debts.
Your insolvency practitioner will find ways to pay back your creditors if you have not committed wrongdoing. If there is no money to pay them back, then in most cases, the company’s debts will be written off. A director should only be liable for company debts if they have committed wrongdoing or have an overdrawn director’s loan account.
How to deal with the emotional side of liquidation
Take time to think about how you are feeling
The first step to deal with liquidation in a positive way is to accept your emotions. It’s completely normal to feel grief, anger, anxiety and many other emotions. Of course, the emotions you feel are likely to be driven by the reason why the company is closing.
If the company closure is your choice, you may even feel a sense of relief. We speak to many directors who feel relieved even after having one conversation with us about potentially closing their companies.
Try not to push your feelings away; instead, accept them. Consider how they are impacting you and think of ways to shift the negativity. This can be tricky, but it does get easier over time.
Speak to a professional
If you are concerned about any aspects of your liquidation, then you should speak to your insolvency practitioner. By seeking professional advice, you know that you are accessing honest and accurate advice, which is so valuable.
If you believe you are struggling with your mental health, then you might find it helpful to speak to a therapist. Remember that you don’t need to struggle on your own.
Look after yourself
When you’re in times of heightened stress, it’s easy to forget about yourself and your own needs. It’s essential to establish healthy boundaries for managing the process and make time for activities you enjoy.
It’s important to recognise that liquidation can often be a long process, so it’s crucial that you take time for yourself.
Be prepared
During the process, your licensed insolvency practitioner will take on many tasks for you, including dealing with any creditor communication and pressure. For the insolvency practitioner to complete their role effectively, they will request information from you. To help them complete their job, you should ensure all of this information is prepared for when they ask for it.
You should also have a good understanding of your company’s financial position and financial obligations. They will listen to your situation, inform you of your legal obligations, and offer tailored insolvency solutions for your company’s liquidation.
Try to be positive
The liquidation of one company is the perfect opportunity for you to look towards the future. Try to remain positive about what’s next for you and reflect on what you have achieved and learnt.
Look for support groups
There are often support groups available for individuals dealing with stress, so attending one of these groups may be helpful.
We hope this blog has been useful regarding emotional support during business liquidation. When your company is closed, it will be removed from the Companies House register.
We understand how difficult this process can be. If you’d like professional guidance, our friendly team is here to help with all aspects of business liquidation and recovery. Please contact us if you need any support, and we will be more than happy to help.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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