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Should You Liquidate Your Company?

Liquidation might be the best option for your business. But, if handled incorrectly, can lead to serious consequences for directors. Read on to find out everything you need to know.

Liquidation is the process by which directors agree to formally close their business and remove it from the company register. Depending on the current financial situation, this can take the form of a Members’ Voluntary Liquidation (MVL) for solvent companies or, more commonly, a Creditors’ Voluntary Liquidation (CVL) for insolvent companies.

For a company with unmanageable debts and no prospect of recovery, this can be a good option to ‘wipe the slate clean’. At least, this is how many Insolvency Practitioners (IPs) will sell their services to directors. However, this is not always the case. Depending on a variety of factors, initiating insolvency proceedings can cause a ripple effect that leaves directors facing unexpected criminal and financial charges.

Should I Liquidate My Business?

There is no definitive answer here and it very much depends on your business’ circumstances as well as your personal liability.

If your business has no liabilities outstanding and little or no assets, then an MVL is a viable option for you. As mentioned further down this page, you need to be 100% sure that your ‘affairs are in order’ before initiating proceedings as liquidation can have unexpected consequences. This is why you should always consult independent insolvency experts before making any final decisions.

If your business has liabilities, you will need to go through the CVL process. This will see a licensed insolvency practitioner appointed to liquidate the business. They will take control of the company and sell its assets to maximise returns for creditors.

Your Pre-Liquidation Checklist

Before deciding to liquidate, ask yourself the following questions.

  • Have you or any other directors signed any personal guarantees for business loans?
  • Have you borrowed money from the company i.e. a director’s loan account?
  • Have you taken dividends when the company was insolvent/struggling financially i.e. illegal dividends?
  • Have you spent a CBILS/BBLS loan on anything other than business expenses?
  • Do you owe large sums to HMRC?
  • Did you ever not follow the rules governing directors’ conduct?

If the answer to any of these questions is “yes” then you need to stop and consult a business debt specialist as you could face serious personal consequences.

What if Your Answer is Yes?

If any of the above are reflective of your experience, formal liquidation proceedings could cause serious financial and legal issues for you and your fellow directors. Some of the issues to consider include:

Personal Guarantees

Any formal insolvency will make you personally liable for these debts. This means that you will be pursued by the lender, often aggressively for the full amount outstanding. In the worst-case scenario, you will lose your assets, your home or even be made bankrupt. Read more about personal guarantees here.

Directors’ Loans in Liquidation

Taking money from your business is not illegal. However, in the event of insolvency, it will be viewed as a company asset. This means that the liquidator will make you repay it. Although you may have ‘only taken a small amount’, liquidators will often add additional costs and other expenses into the final bill. This means you could be asked to pay a vast sum or, face bankruptcy.

Michael Withers

Financial Services Consultant

Having known Bell & company for over ten…

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Having known Bell & company for over ten…

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Illegal Dividends

Similar to a directors’ loan above, illegal dividends are dividends that are taken when a company is not profitable. So, if you take dividends and your company enters liquidation, you will be made personally liable.

So although you may not think you have a director’s loan, you will be pursued. As with a directors’ loan, this will likely be a much larger amount than you initially anticipated. 

Mis-spent CBILS/BBLS

It has come to light that many of these loans were mis-spent or fraudulently obtained. As part of liquidation, your business’ finances will be investigated. If it is found that you spent one of these loans on anything other than business expenses or, you lied to obtain the loan, you can be made liable for the debt. You can also face disqualification and even criminal charges.

These are only a few of the most common issues that arise during the liquidation process. These are rarely explained to director pre-liquidation and the results can be catastrophic.

So, I Shouldn’t Liquidate, What Should I Do?

There are various options available that do not involve formal insolvency proceedings but, they require impartial insolvency experts. Often, restructuring agreements with creditors, refinancing or payment plans can help a struggling business to recover.

If your business is unlikely to recover, liquidation may be the most commercial option available. However, it needs to be done in a controlled manner with the help of experts who have the director’s best interest in mind. Our team will inform you of the worst-case scenario which will allow you to prepare and reduce the personal impact on you.

If you are thinking about liquidating your business, you can contact us today to speak to a business debt specialist for a free, impartial case review.

Contact us today to speak to a business debt specialist.

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