Although Liquidation can often be considered a doom and gloom scenario in the case of an insolvent company there are nevertheless advantages of Liquidating a company. However, any Liquidation (solvent or insolvent) is not a reversible process. It is therefore a serious matter for a company that results in the end of the company’s life.
Liquidation offers an orderly winding up of a company for all of its stakeholders.
In order for Wrongful Trading to arise a company unsurprisingly needs to trade.
If a company goes into Liquidation then its trading activities will cease because the orderly winding up of a company cannot take place whilst it continues to trade.
If trading ceases then a Director cannot be found to have engaged in Wrongful Trading in the period after cessation.
If Directors are concerned they might be exposed to suggestions of Wrongful Trading then Liquidating a company should then protect them from that risk from the point of Liquidation. It will however require complete cessation of trading activities because it is in theory possible for a single trading transaction to amount to Wrongful Trading.
Once a company goes into Liquidation the Liquidator acts instead of the Directors and the debts although not actually written off, remain the responsibility of the Limited company.
When Directors hand the company over to the Liquidator, it is that Insolvency Practitioner who has to deal with the creditors and the debts; it is not something that the Directors any longer have to attend to.
The effect of Liquidation is that except for any personal guarantees the debts themselves remain with the company and upon it being dissolved they are in effect disposed of.
HMRC debts are very common in companies that end up going into Liquidation.
A company’s liability for a range of HMRC debts such as corporation tax, VAT, PAYE, for example, can build up and be stressful for Directors, particularly in the light of HMRC being an effective organisation at debt collection processes with HMRC chasing letters.
Once the company goes into Liquidation the Directors will usually no longer have to worry about running up further crown HMRC debts with pre-existing debts locked into the company. This is even the case if there are HMRC penalties on the existing debts. A word of caution, however: that does assume there is no material misconduct by the Directors that provokes HMRC to issue a Personal Liability Notice.
Upon going into Liquidation the Directors will no longer need to deal with any legal action or proceedings brought against the company.
In most instances but not all, the effect of Liquidation will mean creditors will stop their legal action against the company and claim in the Liquidation instead.
When a company is insolvent and unable to fund litigation, Liquidation can often be a route for the Directors to dispose of the problem and thereby focus their attention on alternative business endeavours that are more profitable for them instead of being tied up in disputes.
A lease is an onerous asset because rent will typically remain due to the company’s landlord for the remaining duration of the lease. This can last potentially years. In addition, a lease will typically provide for dilapidations which the company would potentially be liable for.
However, a Liquidator can disclaim an onerous lease enabling the company to be free of its remaining term and in effect for it to be returned to the landlord.
The same can apply to other sorts of leases other than land and buildings such as hire purchase agreements in respect of vehicles.
When a company cannot any longer afford to pay its employees Liquidation can offer a route for employees to obtain some of the money they are owed reasonably quickly.
If an employee is owed money under an employment contract for arrears of wages, holiday pay and redundancy for example only, they can claim redundancy help from the government’s redundancy payments scheme.
Without Liquidation, there is no other route for the employees to quickly obtain some of their cash. What happens is the government to the extent it pays some compensation to the employees will step into their shoes and be able to claim in the Liquidation for the sums it has paid out.
The benefit to creditors of Liquidation is that it stops the uncertainty of what will happen ie. will they be paid? It enables creditors to focus their energies on more profitable trading activities.
Instead of potentially spending money by throwing good money after bad and perhaps suffering possible frustration if their engagement with the company Directors has not been as they might have liked, the appointment of a Liquidator can result in better overall communications for creditors. It gives creditors a way forward. They can leave matters to a Liquidator who will wind up the company and if they obtain a dividend then all may be well and good.
Creditors who are concerned about Director misconduct in a company that has gone into Liquidation can potentially be reassured that an investigation will be undertaken by the Liquidator who will then have to report his or her findings (subject to confidentiality considerations) to creditors and other bodies.
When creditors feel aggrieved the Liquidation process brings a new party to the table who is independent from the Directors and who will have to do a professional job acting in their best interests.
In a Members Voluntary Liquidation (solvent Liquidation) the effect of it can enable the company’s shareholders to obtain a tax efficient distribution of the company’s assets. This is particularly the case if a claim for Entrepreneurs Relief (now called Business Asset Disposal Relief) can be made by the shareholders personally.
If you are a Director of an insolvent company or a bankruptcy, Oliver Elliot can help you. We Know Insolvency Inside Out.
If you have any questions in relation to Advantages Of Liquidating A Company then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.
This page Advantages Of Liquidating A Company is not legal advice and should not be relied upon as such. This article is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.
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