167 Oakhill Road, London SW15 2QW
020 8874 3100

Should I consider liquidating my company?

Liquidation is probably not what you envisioned when you started your company and it’s never an easy decision to make. However, sometimes it is the best option for a business in distress and there are certainly far worse things that can happen.

In fact, acting quickly to put your company into creditors’ voluntary liquidation (CVL) if you’re approaching insolvency can help you avoid some of the worst aspects of a [insert hyperlink to first piece] compulsory winding-up petition[.]

If you are sure that you have fully investigated all the options available to you, including the current UK government COVID-19 allowances and loans, then liquidation could well be an option.

No more debt stress

If you’re a director of a distressed company, then mounting debts can be one of your biggest sources of stress. The constant struggle to work your way out of an ever-deepening hole, while trying to haul in outstanding invoice payments and taking incessant phone calls from debt collectors, can be overwhelming. 

However, if you voluntarily put your company into liquidation through a CVL then, your debts will largely be written off. Once the assets have been sold and the proceeds distributed to creditors, any unsecured business liabilities that you have not personally guaranteed, will be written off. 

Without having given a personal guarantee, you, as a director, will have no legal liability to repay debts owed by the business. While you will need to cover your company’s Statement of Affairs and some other relevant costs, subsequent liquidation costs will be met through the sale of assets and redundancy or restructuring costs will be taken over by the insolvency practitioner. 

For this reason, entering liquidation can be a very cost-effective option, freeing you from the pressure to make repayments and enabling you to move on.

Put an end to legal action and avoid court proceedings

As with debt, the threat of legal action from creditors can be a constant source of stress to a director at a distressed company. However, once more, this is a problem that can be navigated by voluntarily entering liquidation. 

Again, if you don’t have personal liability for the company’s debts, then creditors cannot bring legal proceedings against you and, following liquidation, any existing legal action against your business will be halted. 

A CVL will also mean you avoid the ignominy of being petitioned by the courts. If you are subject to a compulsory winding-up order, then the petition will be made public in the London Gazette and your accounts and company assets will be frozen by your banks. 

However, with a CVL, you’ll be able to show that the company was closed on your own initiative, rather than having been forced to shut after being pursued through the courts by creditors. 

More control, less risk

A Creditors Voluntary Liquidation generally provides a company’s directors with more control over the course of the liquidation than a compulsory wind-up order would. What’s more, as the process is done with professional advice, the chances of you undertaking actions that could result in wrongful trading accusations are greatly reduced. 

With a voluntary liquidation, you’ll receive guidance from a professional throughout the process, steering you away from decisions that could lead to you being found personally responsible further down the line. 

However, with a compulsory winding-up order, you’ll have to endure the forensic attentions of a court-appointed liquidator, who will often be instructed to find and bring to light hints of wrongful trading. If found guilty of such wrongful trading while working as a company director, you could be banned from acting as a director at any company for up to 15 years. 

Cancel leases

Once your company enters liquidation, your lease and hire purchase agreements are usually terminated and no further payments need to be made. This could be hugely welcome news if you’re struggling with rent or lease payments on top of your existing obligations. 

Generally, the leasor will claim any arrears due from the insolvency practitioners or creditors, meaning you will not be liable for subsequent payments going forward that may have been part of your original lease agreements. 

However, there is a chance that a personal guarantee may have formed a part of the original documentation when you signed a property lease agreement. Therefore, you should carefully check the paperwork to see whether you are likely to be made responsible for any future payments.

Enable your staff to claim redundancy pay

While making staff redundant is something no boss wants to do, in the event of a liquidation, this is what will happen to your workforce. However, there are upsides to this. Funds raised by the sale of company assets will generally be used to cover staff redundancy payments. 

However, should the monies from asset sales prove insufficient, employees can seek to claim wage arrears, redundancy pay or holiday pay from the National Insurance Fund. Therefore, in the event of your company entering liquidation, staff being correctly remunerated is something else you don’t need to worry about. 

Tax considerations

If your company is solvent and you opt to close it through a Members Voluntary Liquidation (MVL) then you may be eligible for certain tax breaks that can make the process beneficial for you. 

For example, with an MVL the distributions made to company members will be taxed as capital gains. Due to the annual exemption from capital gains tax, any amount from these proceeds up to £12,000 will be taxed at 0 per cent. The balance may also benefit from the application of Entrepreneurs’ Relief

Nonetheless, voluntary liquidation is a serious decision and one that you can’t back out of at a later date. It is always wise to fully explore the best option for your business given its particular circumstances, to see if a process such as administration or a company voluntary arrangement (CVA) might be more beneficial to you. 

If your business is in distress and you are considering either a turnaround process or liquidation, click here to find out how we can help you. 

For more on the difference between administration and liquidation, this article compares the two processes.

Scroll to top