Problems You're Going to Face if You Go into Liquidation

If your business is struggling financially, liquidation might seem like the only solution. However, before making this decision, it’s important to understand the potential challenges. As a director, you need to be aware of key risks and how to handle them.

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Types of Liquidation

There are different types of liquidation, each with distinct processes and implications:

1. Creditors’ Voluntary Liquidation (CVL)

This is initiated by the directors and shareholders when the company is insolvent and unable to pay its debts. The process involves appointing a licensed insolvency practitioner to liquidate the company’s assets and distribute funds to creditors. See our CVL Costs specific article.

2. Members’ Voluntary Liquidation (MVL)

Used when a company is solvent but the directors and shareholders decide to close it. The company must be able to pay its debts in full within 12 months.

3. Compulsory Liquidation

This occurs when creditors or HMRC petition the court to liquidate an insolvent company due to unpaid debts. If granted, the company is forced into liquidation by court order, and an Official Receiver is appointed to oversee the process.

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The Voluntary Liquidation Process

Assess the Financial Position: Directors determine whether the company can pay its debts and decide on voluntary liquidation if insolvency is confirmed.
Appoint an Insolvency Practitioner: A licensed practitioner is engaged to oversee the liquidation process.
Shareholders’ Resolution: A vote is held, and if 75% (by value of shares) agree, the company enters liquidation.
Notify Creditors: Creditors are informed and given the opportunity to raise concerns.
Liquidation Begins: The insolvency practitioner sells assets, settles debts, and distributes remaining funds.
Company Dissolution: Once liquidation is complete, the company is struck off the Companies House register.

Overdrawn Director’s Loan Accounts

If you owe money to your company, the liquidator will try to recover these funds to pay creditors. Check your latest accounts or speak with your accountant to assess your position. Addressing this early can lead to better repayment terms.

Directors’ Responsibilities During Liquidation

Once your company is insolvent, your duties change. Your focus must shift from shareholders to creditors to avoid allegations of wrongful trading. To stay compliant:

Seek advice from an insolvency practitioner as soon as financial issues arise.
Stop trading if there is no reasonable prospect of recovery.
Avoid taking on new credit or customer deposits if you cannot fulfil obligations.
Ensure proper financial records and submit tax returns on time.
Do not repay directors’ loans over other creditors.
Be aware that delaying liquidation can worsen personal liability risks.
Fully cooperate with the Official Receiver (OR) or appointed liquidator, providing all necessary financial records.

Risks of Delaying Liquidation

Waiting too long to liquidate can increase personal risks, including:

Wrongful trading: Continuing to trade while knowing insolvency is unavoidable.
Antecedent transactions: Payments to certain creditors over others may be reversed.
Personal liability: Failing to act in the best interest of creditors could lead to financial penalties.
Investigations by the Insolvency Service: If wrongdoing is suspected, directors may be interviewed or required to attend court proceedings.

Bounce Back Loan Misuse

If you took out a Bounce Back Loan, ensure it was used properly. Issues that could lead to fraud allegations include:

Borrowing more than 25% of your 2019 turnover.
Using the funds for personal expenses instead of business purposes.
Transferring the money to personal or third-party accounts.
Repaying personal loans over business creditors.
Failing to demonstrate legitimate business use of the loan.

Preference Payments and Personal Guarantees

When facing insolvency, all creditors should be treated fairly. Paying off debts that you personally guaranteed while neglecting others can be considered a preference payment. Insolvency practitioners may reverse such payments, and you could be held personally liable.

Investigations and Personal Liability Risks

Directors of liquidated companies can be investigated to determine whether any misconduct led to the company’s downfall. Areas of concern include:

Misfeasance: Improper use of company funds or failure to act in creditors’ best interests.
Fraudulent trading: Deliberately accumulating debts without intention or means to repay them.
Breach of fiduciary duties: Failing to act responsibly in managing company finances.
Personal guarantees: If you signed a guarantee for business loans, you remain liable for repayment even after liquidation.

Tax Liabilities and HMRC Investigations

HMRC closely monitors tax debts in insolvency cases. Be cautious of:

Unpaid VAT, PAYE, or Corporation Tax—these could lead to personal liability.
Tax avoidance schemes—directors can face financial and legal consequences.
Unlawful dividends—taking dividends while insolvent may result in repayment demands.
Investigations into tax discrepancies—HMRC may pursue individuals if evidence of tax fraud is found.

Can You Be a Director After Liquidation?

You can still act as a company director after liquidation, provided no misconduct occurred. However, restrictions include:

You cannot reuse the same or a similar company name without permission.
If found guilty of wrongful or fraudulent trading, you may be disqualified from being a director for up to 15 years.
If personal liability is proven, you may face financial penalties or bankruptcy proceedings.

Frequently Asked Questions (FAQs)

What happens to a director when their company goes into liquidation?

Directors lose control of the company once liquidation begins. They must cooperate with the liquidator and may be investigated for wrongful or fraudulent trading.

Can I resign as a director if my company is in liquidation?

Yes, but you are still legally responsible for any actions taken while you were in office.

Can I start another company after liquidation?

Yes, but you cannot use the same or a similar name without permission, and you must not engage in fraudulent activity.

Will liquidation affect my credit rating?

Liquidation does not directly impact personal credit unless personal guarantees were signed.

How long does liquidation take?

It varies depending on the complexity of the company’s financial affairs, but typically takes 6-12 months.

What debts are written off in liquidation?

Unsecured debts are usually written off, but secured creditors (such as banks with asset security) may still recover funds.

Can I be personally liable for company debts?

In most cases, no, unless personal guarantees were signed, wrongful trading occurred, or fraudulent activity is found.

What should I do if I suspect my company is insolvent?

Seek immediate professional advice from an insolvency practitioner to explore your options.

Next Steps

If you are considering liquidation, act quickly to protect yourself and your business. Seeking professional advice early can help you navigate these challenges and explore the best solutions for your situation. Contact us today to discuss your options in confidence.

Problems You’re Going to Face if You Go into Liquidation