When is liquidation the right decision for a business

Business insolvency and liquidation is not something to be taken lightly. Making the decision to liquidate your business is not likely to be an easy one, but it can be the most effective way of safeguarding your business and starting it on the road to recovery.

When a director takes the decision to liquidate, or ‘wind up’ their company, they advise the shareholders that the company is no longer viable, that it is insolvent, and that it must stop trading. If enough shareholders agree (75%) that the company can no longer pay its debts, then the process of liquidation can begin. The company then stops doing business and employing people, and is eventually struck off the company’s register, which is held at Companies House.

But when is liquidation the right decision for a business?

 Sometimes taking the decision to liquidate a business can, in fact, be the best way to save it. This is why it is important that a director can recognise when liquidation is the best way forward, allowing them to implement the liquidation quickly and efficiently.

If your business is insolvent (it can’t afford to pay its debts) and will be for the foreseeable future, or if there is absolutely no way that you can pay your creditors with the company in its present form, then liquidation might be the best option.

It may well be that your company is healthy and profitable, and is trading well, but has severe debts dating back many years. In this case, liquidation could be the sensible decision for the company’s future as it will allow you to start the company again debt free as part of a recovery procedure.

Deciding to liquidate the company voluntarily also means that the processes can be carefully managed rather than inforced. This leads to a much more favourable outcome for the directors as it is far cheaper than having to go through the process of forced bankruptcy. Voluntary liquidation is also much less likely to result in accusations of wrongful trading in the instance of business insolvency and liquidation and the finger of blame being pointed to the directors.

From a director’s point of view, liquidation can allow them to escape from a troubled company debt free, allowing them to start another business or buy back the assets of their liquidated company and continue with a clean slate.

When deciding if liquidation is the right move for your company, you should also bear in mind that liquidation does not necessarily mean the end of your business. In terms of the legal entity of your company, the company will be over, but the actual business can continue. It is important to note, however, that you cannot trade under the same name or even a similar name to your previous company.

It is worth noting that there are a number of alternatives to liquidation that should also be looked into. Liquidation isn’t the right option for every company and it is important that a director carefully considers all their options before deciding to liquidate. Clearly, this is not a decision to be taken lightly as there are a number of costs and legal implications involved in the process but, under the right circumstances, deciding to liquidate the business at the right time, can prove to be the best decision for directors, employees and creditors alike. 

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