Liquidation and your reputation is something potentially for any Director to think about before liquidating their company.
It takes a long time to build a good reputation but it can be damaged much more quickly. This post however does not seek to put any spin on Liquidation being a negative or positive thing. It is a legal process that is both proper and permissible. Indeed in many instances, it is not only desirable but also necessary.
If your business is reliant upon its ability to be linked to trade organisations, requires finance from banks, is regulated, or has a need to obtain credit insurance then you may wish to consider if Liquidation is worth the knock-on effect on your reputation and what (if anything) you might be able to do to avoid it.
The more sophisticated the organisation happens to be that you are dealing with the more information that they may be able to potentially discover from public records, internet searches, speaking to other people and conceivably comparing and contrasting this with information you might have provided to them.
Such organisations may approach a Liquidator to obtain details of the Liquidation to look to establish what has happened and if their risk and reputation is affected by doing business with you in the future. Even if the Liquidator will not produce any information, every year a Liquidator has to produce an annual Progress Report which could reveal information to the public about the company, what has happened, whether you have cooperated with the Liquidator and the level of the debts. If your company does go into Liquidation, it is important that you fully cooperate with the Liquidator. If you do not cooperate with the Liquidator then he or she might seek to compel your cooperation using their statutory powers under Section 236 of the Insolvency Act 1986 and this could be referred to in the reports filed at Companies House.
If however, Liquidation is unavoidable then you are likely to be unwise to try to sidestep it to safeguard your reputation. In fact, you might cause further problems as a result of such action which is why you should consider seeking independent professional advice at the earliest stage that you are facing a financial business crisis.
How Your Reputation Might be Affected By Liquidation
It is a Liquidation of the company and not you as a Director personally. However, if you are a Director of a company that enters insolvent Liquidation then you may wish to consider the fact that anyone who does a search on your name is likely to be able to trace your name to a company that has gone into Liquidation at Companies House.
Before considering if they wish to trade with you, suppliers and customers may search your name at Companies House or with credit reference agencies. If you have been a Director of a company that has gone into Liquidation then they are likely to be able to identify you with such a company.
There are solvent Liquidations as well as insolvent Liquidations but unless someone knows what they are looking for and the distinction between a Creditors Voluntary Liquidation (insolvent) and a Members Voluntary Liquidation (solvent), then it is conceivable that any conventional wisdom about Liquidation that happens to be negative, could impact on them deciding to trade with you.
Director Disqualification Risk, Liquidation And Your Reputation
As a result of Liquidation the Liquidator will report to the Insolvency Service on the conduct of the Directors. That report could spark a chain of events that culminate in your being Disqualified from being able to act as a Director for a period of time. Reputational risk and similar issues obtaining finance can arise from that when you are able to then start being a Director again.
Alternatives To Liquidation
Whilst there might be circumstances in which it could be tempting to seek a Liquidation of your company if it’s debts start to become difficult to manage, particularly in light of the unfortunate commercial impact of Covid-19, it is worth at least considering the alternatives. It might even be so important to your reputation that you may consider if you are willing to stand behind some of the company’s debts personally, even if you do not legally have to do so.
Be aware of unlicensed advisers encouraging you to go into Liquidation when you might not need to do so.
Insolvent Trading Risks
Insolvent Trading is not Wrongful Trading. It can be but it does not have to be. You might be justified in seeking to trade out of your predicament instead of going into Liquidation. You do however have to weigh up the risk that once the company goes into Liquidation as a Director you lose your legal control of it. Even so, once a company is insolvent your primary duty is first to its creditors, not the shareholders.
If you try to trade out of your circumstances you could increase your risks of being subsequently accused of Wrongful Trading or Misfesance. It might not be a simple decision which is why you may wish to seek independent professional advice.
If you are thinking about liquidating your company and would like to call us to discuss how Oliver Elliot can help, please call on 0203 925 3613, or email us at contact@oliverelliot.co.uk. We can help you and are willing to do so initially entirely free of charge.
This post on Liquidation And Your Reputation is provided for information purposes only and no liability is accepted for any reliance upon it. Nothing in this post is to encourage anyone either to go into liquidation and not either to discourage it when it is for example unavoidable. It is about considering the consequences and a transparent outlook on the issues that may arise, in particular on reputation. We hope you have found it helpful and informative.
