I have no experience of insolvency but attended a recent CPD event and wondered what the benefit was of voluntary liquidation (which will cost the client) rather than letting a creditor issue a winding up order?
The only benefit I can see of paying for it themselves is that the whole thing is over with quickly, am I missing something?
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Replies (8)
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Going bust
You tend to have more control in a voluntary liquidation in that you select the liquidator (at least initially) rather than being lumbered first with the Insolvency Service and secondly when thay have finished with a liquidator from their panel.
The costs of both types of liquidation come from the assets and often the compulsory liquidation is more expensive in that 2 sharks have had a meal
Pre Pack
Or you might want to go for a pre pack admistration. IMO these are often just a legal fiddle, but as long as the law allows them they will be used.
Voluntary/Compulsary
The costs of either come out of the assets of the company which the liquidator will sell. If there are not enough assets in the company, the Directors will end up paying so a cheaper option with less hassle is best!
Compulsary involves a lot more investigation by the liquidator and reflects badly on the Directors. All liquidators have to file a report on the conduct of the Directors and it's far better to have a 'friendly' liquidator who understands what happened. If you wanted to start another company following the liquidation and it also failed, two compulsary liquidations can nearly guarantee an adverse report on the Directors whereas two voluntary does not. Adverse reports take you along the route of Director Disqualification.
I would always advise clients to avoid compulsary liquidation, especially if they are planning on continuing in business.
No
Pipper: you said:
'If there are not enough assets in the company, the Directors will end up paying'
No, they will not. Or at least they will not if we are talking about a limited company.
In practice going into liquidation seems not to be any great problem for some people. In one case I know of a builder took a Builders merchant for £20,000 and a month later the rep was around at the new company office (but same builder) offering credit.
Yes they will.
If it's a Ltd company and there are not enough assets to be collected in to cover the liquidation costs then the Directors will be asked to cover the balance.
In practice most companies have enough assets to cover the £6-8k for a voluntary liquidation. I work closely with a couple of liquidators and help with Statement of Affairs and I know of a number of cases where the liquidator has called on the Directors.
Normally if they are setting up in business again, they will buy the assets from the liquidator at a cheap price (leaving the debts behind) and this purchase cost covers the amount due to the liquidator.
I agree that the debts of the business are not usually placed upon the Directors (barring illegal trading etc) - that's why it's called Limited. However the liquidation costs themselves must always be covered.
Thank you
These are really useful replies, thank you.
I have the usual problem of knowing a little but only in theory and so gleaning what actually happens is much better.
You might be missing something
You are right to note that voluntary liquidation is quicker than waiting for a creditor to commence winding up in the court. If the company has assets, these will be applied to meet the costs of liquidation in either case. If there are no assets, then for a voluntary liquidation either the directors or shareholders will normally have to pay the proposed liquidator. The delay involved in court liquidation may cause problems for the directors, if the company, even if it has ceased to be active, continued to incur liabilities for rent, rates, utilities etc, and they will risk being pursued for wrongful trading, which could include personal liability and disqualification proceedings. Also, until formal insolvency has commenced, it will be very difficult for employees to claim for redundancy etc form the Redundancy Payments Service.
The answer is still NO
Pipper: you wrote
If it's a Ltd company and there are not enough assets to be collected in to cover the liquidation costs then the Directors will be asked to cover the balance.
Anyone can ask, but if the directors have even half a brain they just say no. The debts are of the company not the directors personaly. See section 3 (2) The companies Act 2006. If fact, if some debts are being paid in preferance that in itself is risky (for the director(s)).