How to avoid problems when going into liquidation

Our aim at 1st Business Rescue is to provide director focused insolvency advice. Going into liquidation is a stressful time. In this blog, we’re outlining how to avoid problems when going into liquidation. 

We’re always keeping up with the news in our industry, whether that be through the news or even online forums. We recently came across a director on a forum who was 8 months into their liquidation and yet nothing had been completed. We’re going to give you some tips to help you avoid ending up in the same situation as this director. 

Tips to avoid problems when going into liquidation 

Stop rushing 

So you’ve decided to liquidate your business. We understand that you probably want the liquidation process to be over before it’s really even started. But we really would recommend slowing down and taking a step back. 

When you decide to liquidate the company, you must appoint a licensed insolvency practitioner who will take care of paperwork, creditors and closing the company. 

Tell the truth in liquidation 

One of the worst things you can do in a liquidation is lie. The insolvency practitioner has a duty to uncover any director misconduct. That could be through wrongful trading, preference payments and more. 

If you’ve decided to lie, the process is going to get messy and is likely to take even longer to complete. 

Be honest about overdrawn directors loan accounts

Often directors are aware of things like an overdrawn directors loan account and they decide to keep quiet about it. 

To be honest, the insolvency practitioner is always going to find out about this account. It’s highly likely that you will end up being made personally liable for the business debt. If you’re honest, the liquidator can factor this into their original costs, meaning you’re less likely to get a hefty bill later in the process. 

Avoid misfeasance 

Otherwise known as inappropriately using company funds. At the moment we are hearing from so many directors who tell us they’ve used their bounce back loan for an extension on their house. They might think ‘oh everyone’s doing it’ they aren’t. 

From the beginning, it was made clear that bounce back loans were to be used for keeping the company afloat. This means for paying staff wages or buying company assets that you need. Using the bounce back loan for personal benefit is known as bounce back loan fraud and you will be made personally liable for the bounce back loan

Avoid selling company assets under value 

If you’ve sold £10,000 worth of assets to your new business for just £500, the insolvency practitioner is going to question you. You will then have to face the consequences.

The right way to start a new company is through a pre pack liquidation, whereby everything is completed formally and all assets are sold at a fair price. 

It is worth remembering that every single thing we have mentioned can be mitigated by just spending more time at the beginning of the process. You should make sure you have a good understanding of all of these aspects before you appoint a liquidator. 

Consider liquidation costs 

One key piece of advice we give to directors is not to choose a liquidator based on price. We very often see situations where a liquidator has spotted a problem down the line. They’ve then offered the liquidation for a very low price of £2000. The client is happy that they’re going to be liquidated for such a low price and that’s the end of it. Unfortunately it’s not. 

Once you appoint the liquidator they’ll start uncovering more and more issues. The reality is that the more issues they can uncover, the more they can bill for. You need to be wary of cheap liquidation costs.

In order to have the best outcome in your liquidation, you have to take your time, be thorough and also be willing to have awkward conversations. Dealing with liquidation doesn’t need to feel hard work and there are ways you can avoid issues. 

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