As a director of a company, it’s your obligation to ensure the smooth running of the company; this includes ensuring that the company doesn’t operate insolvent. For a director there are a number of disadvantages when it comes to voluntary liquidation of a limited company.
Liquidation is the insolvency procedure that is followed to end a company. All assets are liquidated in order to pay the creditors. There are a number of liquidation options, from compulsory liquidation, where a creditor files a winding up petition against your company to voluntary liquidation, where shareholders identify the best method forward is to close the doors and repay all the debts, removing the company from the register.
Compulsory liquidation is usually the winding up of a company after failure to pay your debts; this is carried out by HMRC or one of your creditors.
What you will find as a company director of a limited company is that voluntary liquidation can be more expensive than anticipated. Most companies choose voluntary liquidation as they realise they are in trouble and don’t want to be forced into liquidation by a winding up petition, without thinking of the financial ramifications.
Voluntary liquidation is where the entire liquidation process is paid for by the directors of the company. With compulsory, the creditor is responsible for paying deposits and fees, which mean it, can work out cheaper for the company.
Another disadvantage to voluntary liquidation of a limited company is all your marketing efforts will be lost. You may have spent years building up your brand, launching your website and focusing on your online success. All that effort and money will be completely lost once the liquidation process is completed.
A creditors voluntary liquidation of a limited company should be the very last resort for any company. Remember once the process is under way and the winding up process starts, as a director you will have to hand over the reins to an approved and licensed insolvency practitioner that becomes the liquidator. The liquidator works for the benefit of the creditors and not for the directors.
After liquidation, the liquidator then investigates the director and his or her actions. They need to identify if you acted in the best interest of your creditors. If you are found guilty, you could be banned from being a director of any limited company for up to fifteen years.
In addition to this, you may be held personally liable if you are found guilty of not working in the best interests of your creditors. As the director you are obligated to work in the interest of your creditors, you need to ensure that you don’t operate an insolvent business.
You may be found guilty of using liquidation as a deliberate way to not pay your creditors, which means you will be held personally responsible.
Liquidation may seem an easy way out for many company owners, but it is imperative that you understand the process, what it can means for the directors and the company as a whole. You should always try and find a reputable and reliable turnaround practitioner who can work in your best interests throughout the processes paying due diligence to the creditors.
So many directors are under the impression that insolvency practitioners work in their best interests, but unfortunately this is not the case. An insolvency practitioner works in the best interest of the credits, which can result in the director finding themselves responsible for the debt moving forward.
Ensure the decision of voluntary liquidation of a limited company is taken with care to ensure you are making the best decision for you and your creditors in the future.