If your company is in difficulties, it’s tempting to do everything in your power to put off the act of liquidation. That’s understandable. You’ve invested so much time and money into building your company that you don’t want to become insolvent due to short-term trading difficulties beyond your control. You want to try and tough it out; after all, something could turn up.
Unfortunately, this is often the wrong course of action. Indeed, it can leave you in a more difficult situation. When your company clearly has no future, it’s important to act quickly and promptly. So what happens next?
Voluntary or Involuntary Liquidation?
There are two forms of liquidation: voluntary and involuntary. The company directors instigate voluntary liquidation, whilst involuntary is usually initiated by one of the creditors.
With involuntary, or compulsory, liquidation a third party lodges a petition with the courts. This is usually one of your creditors, but it could also be a shareholder, the official receiver, or the Secretary of State.
Voluntary liquidation is the quickest and easiest way to deal with a company that’s insolvent and has no future. It’s undertaken by the company directors, who then have access to an insolvency practitioner. They may look at other options beyond liquidation, but if it’s deemed to be the best option, they would approach a liquidator to wind up the company.
After that, the company assets are sold off and the proceeds used to pay off as many of the creditors as possible. All the property and holdings will be disposed of, then the company will be dissolved. However, whether you opt for voluntary or involuntary liquidation, the end result is the same. Once liquidation has begun, any litigation involving the company ceases. No further legal action can be taken by creditors.
A Limited Liability Company
If your company is limited liability, the directors will be exposed to very little risk unless they’ve acted improperly. Indeed, if the director has been on the payroll, they can actually claim a statutory redundancy payment.
However, the definition of ‘improper’ in this situation is complicated. Directors can be at risk if they’ve failed to keep books and records correctly, failed to act promptly and reasonably, or taken credit knowing it cannot be repaid. Much of this would be regarded as wrongful trading and they may face personal liability for company debts.
If the company is wound up by creditors, the official receiver will investigate the activities of each director over the previous few years and file a conduct report. If the directors are found wanting, then the protection of directors under limited liability can be lifted and they will become personally liable for the debts of the company. The result could be bankruptcy and disqualification as a company director.
Find Out More
Here at Irwin Insolvency, we specialise in rescue and turnaround for businesses. We offer clear, impartial advice on all aspects of liquidation. If your business is experiencing difficulties, get in touch with one of our friendly, empathetic team today. Remember, act quickly and promptly to avoid personal liability.