Liquidation Advantages and Disadvantages

Some of the main advantages and disadvantages of Liquidation are given below. These will be more or less relevant for you depending on the nature of your company and any debts it owes. You should take expert advice before deciding to Liquidate your company.

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Advantages of Liquidation

1. Company debt written off
If a  company is no longer able to operate because of increased competition or a significant change in the market it is unlikely to be able to repay its outstanding creditors. The closure of a company through Liquidation will result in any outstanding debts being written off. This leaves the directors to focus on new opportunities.

2. Relatively low one-off cost
The cost of liquidation is relatively low. There will be an initial cost for preparing the company’s Statement of Affairs and calling the creditors meeting. However any further liquidation costs are then paid for from the sale of the company’s assets.

3. Investment funds can be focused on new business opportunities
Once a company is liquidated there is no ongoing burden of debt repayments. Available investment funds can then be used for other business opportunities rather than used to repay debt.

4. No redundancy or restructuring costs
After a company is liquidated it is the job of the Liquidator to make any employees redundant. Redundancy payments must be made from the assets of the company.  Any long term liabilities such as leases are cancelled by the liquidator. These costs do not have to be paid by the directors or shareholders unless personal guarantees have been given.

Disadvantages of Liquidation

1. Directors will have to pay Personal Guarantees
It is common for the directors of smaller companies to have given personal guarantees to pay company debts. After the company is liquidated they will become personally liable for the repayment of these debts. Creditors with personal guarantees can take legal action against any Guarantor to enforce the payment of their debt.

2. Director’s Loan Accounts must be repaid
If a director has borrowed money from the company this will have to be repaid after the company is liquidated. Outstanding loan accounts may exist if a director has drawn dividend payments when the company had no profits. The liquidator will use legal action against associated directors to enforce the repayment of this debt if necessary.

3. Business assets cannot be retained
The liquidator will try to sell all of the company’s assets in order to raise cash for both the payment of their fee and the partial repayment of the company’s creditors. As such valuable assets may be broken up and the opportunity to use them in future business enterprises lost. One way to prevent this may be the use of a Pre Pack solution.

4. Productive employees and teams may be lost
The liquidator will make all the employees of the company redundant. As such it is likely that experienced teams and individuals will scatter. This may then make the rebuilding of a new business difficult if similar skills are required. The loss may only be prevented if any part of the business can be sold as a going concern.

5. Investigation of Director’s Conduct
Once a Liquidator is appointed they must report on the conduct of any directors of the company. If the liquidator feels that the directors may have acted improperly this will be made known to the Insolvency Service. Further investigation may then be undertaken. If misconduct is proved this could lead to directors being disqualified or even held liable for some of the company’s debt.

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