Liquidation is used to close a company. It is normally considered if the company has run out of cash and is unable to pay its debts. Closure may therefore be the only remaining option.
- When is it sensible to close a company?
- Is Liquidation always the best solution?
- What alternative options can Directors consider?
- Are directors liable for any company debt?
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Use Liquidation if the Company has no future
Directors should consider closing a company using Liquidation if they believe it has no future. Perhaps the company is no longer able to carry on because of a severe change in the customer base or competition. Alternatively it may simply be a victim of mismanagement.
The directors might think that the company could be profitable with the right change in strategy. If this is the case alternative solutions should be considered first. Options such as a Company Voluntary Arrangement or Pre Pack can be used.
However the company may be unable to change to meet the new challenges. As such there may be no chance for it to trade successfully in the future. In these circumstances closing it will probably be the right solution.
Use Liquidation if the Company cannot pay its debts
If a company has run out of cash and is unable to pay its debts it is insolvent. This situation cannot just be ignored. However before closing the business using liquidation the directors could first consider a solution to reduce the debt repayments.
One option is a Company Voluntary Arrangement (CVA). This is an agreement with the company’s creditors to reduce the amount it has to pay them. Alternatively the directors could consider a Pre Pack. This is where a new business is stated to trade in place of the old debt free.
If these options are not suitable the company cannot be allowed to continue to trade. If it does and the position of the creditors is made worse the directors may guilty of wrongful trading. They could then face disqualification and even be held liable to repay company debt. Liquidation will then often be the only choice.
The Directors should understand the implications of Liquidation
When a company is closed through liquidation the directors are not normally liable for the outstanding debts. This includes amounts owed to HMRC. However directors may still be left with responsibility for some debts.
If any directors loan accounts are outstanding the director who borrowed the money will be personally liable to repay this. In addition directors will become liable for any company debts they have personally guaranteed. Legal action can be taken against directors to enforce repayment of these debts if necessary.
Directors also need to be aware that as part of the liquidation process their conduct will be investigated. If the liquidator feels they have wilfully allowed the position of creditors to get worse they could face disqualification.