There are both pros and cons to voluntary liquidation, and the decision to undergo this process should be carefully considered
One advantage of creditors voluntary liquidation is that it can provide a way for the company to crystallise its debts and allow a dividend to be paid to credits.
However, there are also potential disadvantages to creditors voluntary liquidation. One disadvantage is that the company’s assets may need to be sold at a discount in order to pay off its debts, which can result in a financial loss for the company and its shareholders.
Additionally, CVL can be a time-consuming and costly process, as it requires the company to sell off its assets and wind down its operations. This can be especially challenging for companies that have a significant number of employees, as CVL may result in job losses.
Advantages and Disadvantages of Company Liquidation
As with any type of insolvency process a limited company liquidation comes with a number of pros and cons, here are the most common:
Advantages of a Creditors’ Voluntary Liquidation
Control over timings
The decision to commence a Creditors’ Voluntary Liquidation must be made via a resolution of the board of directors, then ratified by a resolution of the shareholders. This means that as the director of the company being put into liquidation, you will have control over the timing of when the liquidation process commences.
Control over the timing means more time to prepare the company for the liquidation. This is a distinct advantage when compared with compulsory liquidation, where the company’s creditors force the company into liquidation, and the directors have no control over timing.
Outstanding debts are written off
Being unable to repay existing debts with no way of turning the company around is a stressful situation for any director. You cannot continue to trade if you are insolvent, and a CVL offers a way of dealing with these outstanding obligations in a way which aims to maximise returns for creditors.
Unless personal guarantees have been given for company debts, as a director you have no legal liability to repay monies owed by the business. Upon the company entering liquidation, any personal guarantees which have been given will crystallise and the responsibility for paying these associated borrowings will belong to the director/guarantor.
Legal action is stopped
If there is any any legal action taking place against the company is stopped when the company is in liquidation. This is unless as a director has no personal liability for a company debt, creditors will be unable to take action against you.
Liquidator deals with creditors
Once the liquidator has been appointed, the company’s creditors will need to communicate with them and not with you as a director. This can be a huge relief in situations where you are receiving threatening calls and letters on a frequent basis from creditors demanding to be paid because the company is insolvent and the company can’t pay its outstanding debts. The liquidator also has to pay the creditors in a predetermined order of priority, so there is very little room for creditors to claim they have not received their allotted share of the liquidation proceeds.
Staff can claim redundancy pay
Members of staff will be made redundant by the liquidator, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realised from the sale of company assets are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. The National Insurance Fund pays out for redundancy, unpaid wages and holiday pay should the company not be able to do so using its own funds
Potential for directors to claim to redundancy
It’s relatively unknown that directors can claim redundancy pay on the liquidation of their company in some cases. If a director has worked as an employee for the company for at least two years, received a salary under PAYE, and worked a minimum of 16 hours per week in a practical rather than an advisory role, they may be able to claim the same statutory entitlements as member of staff.
It shows that directors are fulfilling their legal obligations
Under UK insolvency law directors are legally obliged to be aware of their company’s financial position at all times. By entering into voluntary insolvent liquidation they prove that this is the case and can limit creditor losses as well as their own reputational damage.
Leases can be cancelled
Lease and hire purchase agreements are generally terminated at the date of liquidation, meaning that no further payments need to be made. If any arrears are owed, the company leasing the goods the lender may be able to claim from the insolvency practitioners along with other creditors. If a personal guarantee has been offered upon signing a property lease agreement; you should check your documentation carefully so you know whether you are likely to be made personally responsible for the remainder of the lease.
Disadvantages of a Creditors’ Voluntary Liquidation
Company Will be Closed
The creditors voluntary liquidation process will end with the company’s assets having been sold off and the company itself wound up. This cannot be undone. You will not be able to start a company with the same name unless you seek advice and follow a prescribed process. Unless you do this, if you decide to start another company in the same field, any goodwill that has been built up in the company’s brand name will be lost.
Accusations of wrongful trading
On liquidation, the appointed insolvency practitioner is obliged to investigate the conduct of all directors. A detailed report is sent to the Department for Business, Innovation & Skills (BIS), and if a case is successfully brought against one or more directors, they could face severe penalties. These include a ban from acting as a director for up to 15 years, and in serious cases prosecution through the courts and a prison sentence may ensue.
Staff redundancies
Unfortunately, all staff are made redundant when a company enters Creditors’ Voluntary Liquidation. If the company is unable to make the required redundancy payments, which is often the case with insolvent liquidations, employees can make a claim from the National Insurance Fund (NIF).
Personal guarantees will kick in
If directors have provided personal guarantees for any of the company’s borrowing, lenders will expect repayment according to the terms and conditions of the loan. This could place directors’ personal finances at risk – if they can’t pay, lenders will pursue them through the courts.
Public process
It’s a requirement of a CVL that the creditors’ meeting has to be advertised in The Gazette, which means it is publicly reported and is on the public record. There’s no way to avoid this requirement. This can damage a director’s business reputation in some cases, although less so when compared with compulsory liquidation as the directors have placed creditor interests first.
No Returns for Shareholders
As the company is insolvent, it’s highly unlikely that there will be any returns for the company’s shareholders from the liquidation. Any proceeds realised from the liquidation are likely to be swallowed up paying the liquidator and the creditors.
Liability for overdrawn directors’ current accounts
Each director will be held responsible for repayment of their own director’s loan account should it be overdrawn. The liquidator has the power to force directors to repay this debt if necessary.
Read more: Creditor Voluntary Liquidation vs Compulsory Liquidation
Conclusion
Company liquidation refers to the process of dissolving a business entity and distributing its assets to its creditors and shareholders. Like any other business decision, liquidation has its advantages and disadvantages. One of the most significant benefits of liquidation is that it allows the company to clear its debts and liabilities, providing the opportunity for a fresh start. Additionally, it can relieve the directors of the stress and pressure of running a struggling business.
There are also some drawbacks to liquidation. One of the primary cons is that it may result in job losses, affecting the employees’ livelihoods. It can also harm the company’s reputation and result in legal action against the directors if they are found to have acted improperly. Furthermore, the process of liquidation can be time-consuming, complex, and expensive, making it a challenging decision for many business owners.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.