When a company goes into liquidation, simply the business and assets are sold and turned into cash for creditors. Usually liquidation is the last option to consider but if the business is no longer viable and is running up more and more debt, then liquidation can bring an end to these worries. Many business owners are misinformed about liquidation and what effect it can have against a director’s reputation and capabilities of starting up a new company. Here is a video by Keith Steven, he has over 20 years of experience in rescuing companies in financial difficulty.
It’s my company so I can liquidate it myself There are two types of liquidation, compulsory liquidation and creditors’ voluntary liquidation (the latter is the most common). Neither liquidation can be done by a director of the company. In the case of compulsory liquidation, only an official receiver of the Court can be appointed liquidator. If it’s a creditors’ voluntary liquidation (CVL), as the name suggests, only creditors of the company (those who are owed money/debt) can appoint a liquidator.
The directors can inform shareholders and the board if they believe liquidation is the best option. If agreed, shareholders can then have a creditors’ meeting arranged where creditors vote. I can’t start up a new company Yes you can. You won’t be barred or disqualified from being a director in the future. Do ensure, however, that you have enough capital to get off the ground. Also be very careful what you name your new company as it is a criminal offence under the Insolvency Act to use the same or similar name. In some circumstances the business itself may be able to continue but under very strict conditions (phoenix companies).
From a creditors’ point of view, some directors can be seen to be getting off ‘scot-free’ without dealing with the consequences. However, there are strict regulations in place which directors must follow, particularly if selling assets before the company is liquidated. Assets must be sold to the director or another company at a fair value otherwise this transaction could be reversed by the liquidator. This is known as ‘transactions at under value’.
Going into liquidation will affect my personal credit rating - No, it won’t affect personal credit rating unless:
- you’ve acted fraudulently
- have personal guarantees, therefore you personally owe debt, (could have an impact on your credit rating)
- You have an overdrawn directors’ accounts
Creditors will be coming after me Creditors would be breaking the law if they pursue you for any debt after the liquidation process has already divided up all money from assets and delivered the proportion owed to them. That is all they are able to receive. I can decide who is owed the debt As soon as your company becomes insolvent, you must act to maximise creditors’ best interests. Tread carefully here and seek expert advice on how to proceed so the situation does not worsen. If the liquidator finds you have ignored creditors’ interests, legal action could be taken against you personally. There is also a legal term in insolvency referred to as the preference insolvency act. If it’s proven you have chosen to pay back more debt to one creditor than another on purpose (known as a desire to), then this will be seen as a preference and all parties involved may be personally liable and directors may even be disqualified.
Again, seek advice so you know what you can and can’t do in the event of insolvency. Remember... Just because this business failed, doesn’t mean your next one will. Businesses come and go for a vast number of different reasons. You should never let the fear of liquidation deter you from starting up a business. Author Bio: Keith Steven of KSA Group Ltd has been rescuing and turning-around companies since 1994; he has worked for insolvency firms, turnaround funds and venture capital investors. He is the author of the site www.companyrescue.co.uk. Follow Keith on Google+. photo credit: kenteegardin via photopin cc