If your company is struggling financially, liquidation is definitely an option. We provide honest, confidential expert advice and can ensure that you are aware of all the options available to you. Here, we’re telling you the pros and cons of liquidation.
What is liquidation?
There are a few different types of liquidation you can choose depending on your circumstances. A creditor’s voluntary liquidation is used by directors running insolvent companies that cannot pay their debts when they fall due. A member’s voluntary liquidation is used by directors running solvent companies who can afford to pay debts over a certain period of time.
Compulsory liquidation is used by insolvent companies that cannot pay their debts on time. As the name suggests, businesses are forced into this form of liquidation. They are often served a winding-up petition by an official receiver and forced to close the business if debts are not paid off by a specific date.
Don’t worry if you’re unsure which liquidation process is right for your business. Our expert team can provide you with advice.
Pros and cons of liquidation
Disadvantages of liquidation
We will start with the cons of using a liquidation procedure because it’s not a golden bullet that solves everything. There are some disadvantages that you need to be aware of.
You’ll be asked to pay director’s loans
The first disadvantage is that you may be asked to pay directors’ loans. These are loans that you have taken from the company. In an ideal situation, you would only take money from the company when it is making more than what you’re taking. This would leave your account in credit.
It’s the role of the insolvency practitioner to check for an overdrawn directors’ loan account and to chase you for outstanding debts, so don’t think that it will go unnoticed.
You’ll be investigated
Many directors need to be made aware that they will be investigated when they enter a liquidation. This involves looking into how well you have adhered to your director’s duties. The insolvency practitioner is duty-bound to analyse your conduct. They will be looking for things like preference payments, fraudulent trading, bounce-back loan fraud and more.
They will closely examine your business bank accounts and actions over the last three years, leading to liquidation. Everything you’ve done will be scrutinised, such as money taken out, assets sold and more – it will all be assessed.
If you’re concerned about any of these aspects, you should seek professional advice early.
Can’t use tax losses
If you have any tax losses in the business that you use for tax purposes, these will disappear with your liquidation. This means that these tax losses cannot be used in the future if you set up a new company.
Creditors lose money
If you’re struggling to pay your creditors on time, then it’s likely that they’re already struggling too. If you enter liquidation, they’re going to continue losing money. Examples of some credits that may not get paid include your suppliers, HMRC, the bank, investors and more. This is really something you need to think about.
Personal guarantees will be called in
One aspect that many business owners don’t often think about is personal guarantees. If you’ve signed a personal guarantee and you enter a liquidation, your guarantee will be called upon. This means the institution that lent you the money or the supplier that gave you the goods and asked you to sign a personal guarantee is going to send you a notice highlighting that they want their money back.
Advantages of liquidation
You’ll need to consider all aspects of liquidation. Despite there being some disadvantages, there are also many advantages that can help you to stop worrying about not being able to pay debts on time.
Unsecured debts are written off
Some unsecured debts can include your bounce-back loan or CBILs. These will be written off in a liquidation procedure. However, you must prove that the money was used to benefit the company and not for your own personal benefit. Your personal benefit may have included a holiday or a house extension.
Supplier debts are written off
This includes money you owe suppliers or HMRC, including PAYE, VAT and corporation tax. All of these debts are written off in liquidation, providing that you meet the requirements.
Gives you a fresh start
Deciding whether to enter liquidation or not can be a stressful time. Many directors that we speak to suffer from sleepless nights while they try and think of the best solution for their business. Many directors find themselves in a better head space once they take action to enter liquidation.
Some directors may decide to start a new venture or pre-pack their existing company, there are options available for you to consider. Taking action helps clear the fog and worry in your head when you don’t know what to do.
Employees can claim redundancy
The National Insurance Fund provides employee redundancy if an employer cannot pay. By entering liquidation, you allow your employees to request this money and not have to deal with any more financial hardship.
Our advice
The main thing to remember if you’re considering closing your business is that you must understand everything. Of course, there will be clear reasons to take a particular step, but don’t forget about the disadvantages. These need to be considered as well.
If you’re searching for an insolvency professional, just be wary if it all sounds too good to be true. It’s helpful to seek advice from multiple licensed professionals to get a balanced opinion.
Don’t forget that we’re always here to help, even if you just need a chat to discuss your options. You can book meetings with our experts using the website. We hope this blog has been helpful to you on the pros and cons of liquidation.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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