Advantages & Disadvantages of Liquidation

Advantages And Disadvantages of Liquidation

Advantages & Disadvantages of Liquidation was written by John A Waller, Director, and updated on June 28th, 2024.

Advantages & Disadvantages of Company Liquidation? 

The liquidation of a limited company

When a company liquidates, its assets are used to pay off its debts, and any money left goes to shareholders.

The advantages and disadvantages of liquidation, although an easy insolvency process to implement, enable directors to draw a line, and creditors crystallise their debtors.

The company’s directors must understand the impact of liquidation on you and your company.

Directors often avoid liquidating an insolvent company. They feel it is best to trade on (even though insolvent) to improve matters for them and their creditors. However, doing so is probably the worst thing a director can do without first seeking advice from a licensed insolvency practitioner.

So! What are the Pros & Cons of Liquidation?

HBG Advisory provides initial Free Insolvency Advice.

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Should I consider liquidation?

Liquidation of a limited company by a creditor’s voluntary liquidation CVL is an advantageous legal method of closing a limited company that is no longer viable. However, a CVL is unsuitable for solvent companies or if the limited company is feasible and a restructure is plausible, including a company voluntary arrangement (CVA) explained or utilising a company administration. Thus saving the company and allowing it to continue trading. Something a liquidation does not offer. 

Limited companies registered in England and Wales may either liquidate voluntarily or be compulsorily liquidated by an unpaid creditor.

So, when considering liquidating your limited company, please note the seriousness of the decision. HBG Advisory strongly recommends that you seek the advice of qualified Insolvency Practitioners like those at HBG Advisory.

The main disadvantage of liquidation remains that your company ceases to exist. For further reading, please view ‘A company in liquidation‘.

As a company director, you must understand the full extent of limited liability when operating a limited company. This way, you can ensure you are not liable for any debts or damages the company may incur.

Directors often seem concerned about the options for company directors when they are having difficulty.

Advantages And Disadvantages Of Liquidation? – Why Do Businesses Go Into Liquidation?

  • The business remains no longer able to pay creditors as and when they fall due;
  • liabilities of your business are more significant than assets;
  • The company trades at a loss and is no longer viable;
  • The directors are finding it hard to cope with the stress and pressure of trading;
  • You are concerned as a director about declining sales and exposure to potential wrongful trading;
  • You require a third party to deal with pressing creditors legally.

Any employees paid through the PAYE scheme of the company may claim for:

  • redundancy,
  • unpaid salary;
  • holiday pay and 
  • notice pay.

When the company liquidates, the liquidator’s team helps apply to the Government Redundancy Payments Service. Redundancy payments are capped at £700 a week (£643 if you were made redundant before 6 April 2024).

Contact details: –

Redundancy Payments Service
redundancypaymentsonline@insolvency.gov.uk
Telephone: 0330 331 0020
Monday to Thursday, 9 am to 5 pm
Friday, 9 am to 3 pm

Advantages of Liquidating A Company.

  • HM Revenue & Customs will no longer pursue directors for PAYE or VAT;
  • The need to carry out statutory filing duties ceases;
  • Relatively low cost to carry out;
  • Unpaid debts are usually wiped clean;
  • Directors and companies avoid court processes:
  • Onerous leases cease;
  • Closure is offered to the company while it is enduring financial operating issues. Legally for good;
  • Does your company have creditor pressure? The liquidator ends creditor pressure and deals with creditors, not the former directors;
  • Directors, once removed from office, may either set up a new trading entity, seek new employment or retire;
  • County court judgments (CCJs) and outstanding legal actions stop;
  • Excludes burden from directors & stakeholders;
  • Former employees will claim unpaid salaries, holiday pay, notice pay, and government fund redundancy. However, this is subject to some limits;
  • HMRC deals with the liquidator, not the directors now, for the companies arrears of tax;
  • Directors’ duty to deal with company creditors stops, though the director personally guarantees creditors. We require the director to deal with outside the liquidation;
  • Overall, debt is normally greater than the cost to close;
  • Directors can move on with a new project provided no wrongful trading is found.

So, understand ‘How do I liquidate my limited company ‘ and ‘ How do I take care of my employees during insolvency?

Disadvantages Of Liquidating a Company

Liquidation also has its disadvantages, including;

  • The company closes;
  • All companies’ assets are sold to repay creditors;
  • Director guarantees will be required to be repaid if a shortfall occurs;
  • The companies, employees and directors are all made redundant;
  • overdrawn directors’ loan account will be required to pay back;
  • Liquidation wipes out the former business’s satisfactory standing, trading licenses and possibly other assets valued while solvent now with no value once the company liquidates;
  • Using the former name of the former business name is not allowed. Take careful legal advice if you wish to explore further, taking into account the Insolvency Act 1986, sections 216 and 217;
  • Unlawful Dividends paid incorrectly to the shareholder will need to be repaid to the company ( Paid when the company had no retained profits to pay a dividend, a common error);
  • Repayment of directors’ overdrawn loan accounts, as they are an asset of the company; overdrawn directors’ loan accounts will have to be repaid;
  • The companies trade suppliers and other creditors, therefore, face losing money;
  • Directors face wrongful claims if traded insolvent;
  • Liquidation of a limited company does not impact the director’s credit score. However, the information is retained and made public at Companies House;
  • A Company Administration remains faster to set up and offers potentially better returns for the company’s creditors;
  • Losses accumulated for tax purposes remain forfeited once liquidated.
  • The liquidator submits a director’s report on their conduct before their appointment.

Why Do Businesses Go Into Liquidation?

  • If the business cash flow does not allow the payment of debts as they fall due (Cash Flow Insolvency).
  • Liabilities exceed total assets (Balance Sheet Insolvency).
  • The business is making losses, and you need help turning the situation around.
  • The directors need support with the stress and pressure of trading.
  • Concerns over trade declining and wrongful trading if you continue.
  • The directors have determined that it would be beneficial to delegate the management of creditors and all related claims to another individual.

Employees entitled to unpaid:-

  • redundancy,
  • salary,
  • holiday pay, and
  • Notice pay.

They can claim this from the Redundancy Payments Service from the Insolvency Service.

Former Directors may also claim redundancy, subject to specific criteria.

Employee Rights

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