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The benefits of liquidating and dissolving a limited company

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benefits of liquidating and dissolving a limited company

Liquidating your business may seem like a hugely daunting prospect, and it is generally seen as a last resort.

But when you find yourself unable to repay creditors, and you’ve exhausted all other options, it could be the most logical solution.

When a business finds itself in too much debt to recover through procedures such as financing, administration, or a Company Voluntary Arrangement (CVA), it may be that a Creditors’ Voluntary Liquidation (CVL) is the only viable course of action.

When a CVL happens, shareholders and directors will agree to place the business into liquidation because it can no longer pay its bills when they fall due. As a result, the company will cease all trading, and its assets will be sold to repay its creditors.

There are several benefits for an insolvent company when a CVL occurs:

Any legal action is halted.
When your company is in liquidation, no legal proceedings can be taken against it. Providing you have no personal liability for your company’s debts, your creditors will be unable to take any further action against you.

By liquidating your business voluntarily, you’ll avoid being petitioned through the courts and can show the public and your customers that the liquidation was a company choice rather than a result of being pressured by creditors.

The cost is relatively low.
The costs of arranging a Statement of Affairs and holding a creditors’ meeting will need to be funded by the directors. Still, those should be the only upfront costs as any professional fees will be paid from the sale of assets, as long as these are sufficient to cover those costs.

You must appoint a professional firm of Insolvency Practitioners (IPs) to instigate both the Statement of Affairs and the creditors’ meeting.

Any outstanding debts are written off.
It can be a hugely stressful time if you’re unable to repay your existing debts and feel like there is no way to turn your company around. If your business is deemed insolvent, you are not allowed to continue to trade. Choosing a CVL provides a solution to deal with any outstanding obligations and will help maximise returns for your creditors. 

Employees can claim redundancy pay.
The IP will force redundancy on staff members. However, if eligible, they will be able to claim redundancy pay and other statutory entitlements if the sale of assets is insufficient to cover these redundancy payments.

In that case, the National Insurance Fund will payout for redundancy, unpaid wages, and holiday pay that staff are owed.

Any leases can be cancelled.
No further payments will need to be made on lease and hire purchase agreements, as such terms are typically terminated when your company goes into liquidation. If any arrears are owed, the business leasing the goods may claim from the IPs, together with any other creditors.

Are there any other options?
You may also close your company through dissolution. A voluntary dissolution can remove your business from the Companies House Register, providing you abide by certain conditions.

The most crucial factor to note is that you cannot dissolve your company if it has significant debts to its name, and you must meet all of the following requirements:

  • Your company has not traded for three months (this must be a genuine cessation of trade).
  • Your company has no assets, property, or cash at the bank.
  • Your creditors are informed, and you have requested their permission for the dissolution.
  • Your creditors are given three months to consider the request to dissolve your company. They can also reject this request.
  • Your company has not changed its name in this period.
  • Your company has not disposed of any assets or property (this may include land and buildings, plant and equipment, debtors, and other assets).

What are the advantages of dissolving your company?

  • Your dormant business will be quickly removed from the Companies House Register.
  • You will avoid having to pay for liquidation, fees, and expenses.
  • You will avoid formal investigation into the conduct of directors, which is required in receivership or liquidation.

If you’d like to know more about dissolving or liquidating your company, please contact the Future Strategy team today.

Do you need help with a Further Reading On Liquidation and Limited Companies:

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