5 Common Myths and Misconceptions about Limited Company Liquidations

It is estimated that only one in five businesses reach the five-year mark, so business liquidations are a fairly common occurrence. The significant confusion about what this entails only adds to the worry and fear directors experience when a business begins to collapse. The fear of what could happen to them after the liquidation sometimes keeps people from starting businesses in the first place.

Here are five common myths and misconceptions about limited company liquidations and the truth behind each issue.

Limited company liquidations

“It Will Ruin My Personal Finances”

Many people are afraid to shut down their limited company because they think creditors will come after them personally. However, the very structure of a limited company prevents this from happening.

You’re not personally responsible for the liquidation, and you’re not personally responsible for the debts. It is actually against the law for them to pursue you personally for the business’s debts. Once the creditor receives their share and the insolvency practitioner signs off on it, they’re not allowed to do anything else.

However, if you engage in wrongful trading, then you could be held personally liable for the company’s unpaid debts. Other rule violations like taking on new business credit though you know the business cannot repay it can lead to disqualification proceedings and, in theory, personal fines and personal bankruptcy.

The only exception to this is if you’ve signed personal guarantees for debt taken on by the company. Then they could pursue you for the remaining balance. In these cases, consult with a legal expert and start shutting down the business before your personal liability soars.

“Company Liquidation Is a Disaster”

Company liquidation can be a negative process, but it is not always so. It is an organized legal process that should be overseen by an experienced professional – and that isn’t going to be one of the directors. You can still be respected after you’ve closed down a business that isn’t doing well. And if you do things right, you would be able to move on to another similar role if you chose to do so.

A director has little risk and limited liability for the liquidation as long as they’ve acted properly and in time. Acts like continuing to take credit after knowing the company cannot repay it, failing to keep proper records or failing to act reasonably are what put the director at risk. Following the rules and seeking legal counsel as soon as possible so you don’t make a mistake helps you reduce the risk you face as a director. In fact, if the director has been within legal compliance and on the payroll for a long time, they could actually claim redundancy like any other employee.

If you need more information, you can learn about what happens after liquidation here through the experts.

“I Won’t Be Able to Start Another Business”

While your business may have failed, this doesn’t prevent you from starting a new one. In a few cases and under very strict conditions, you may even be able to reuse the name of the liquidated firm, or a “phoenix company” as it is commonly referred to.

Thinking and pondering entrepreneur

“I Can’t Head a Firm After This”

This misconception contains a small gem of truth. If you do not follow the proper procedure when a business becomes insolvent, you may be disqualified or banned from becoming a director elsewhere. However, many successful directors have liquidated companies and closed down their firms only to move on to a similar role elsewhere.

The law – and many other businesses – recognises that things can go wrong. As long as you follow the rules, you could still move into management somewhere else.

“I Can Liquidate My Own Company”

This is a common misconception, and it may be the most damaging one on our list. Company directors cannot liquidate their own assets. There are two kinds of liquidation: members’ voluntary liquidation and compulsory liquidation.

In a members’ voluntary liquidation, shareholders instigate it; this is the faster of the two processes. In a compulsory liquidation, unpaid creditors instigate it. In both types of liquidation, the liquidation must be led by an appointed liquidation practitioner by law. That person is usually an official receiver of the court.

If you fail to act and the company ends up in compulsory liquidation, the official receiver will investigate each director and the business for actions taken over the prior two to three years. That is called a conduct report. If a director knowingly traded while insolvent, failed to submit accounts or commit another offense, then the director could face personal action. That is called lifting the veil of incorporation.

If you try to do it yourself, you could violate the rules and end up not being allowed to become a director somewhere else. Always consult with an experienced insolvency practitioner if your firm will be going through liquidation.

Understanding the truth about limited company liquidations allows you to make the right decision when there is still time to act to minimise personal risk, liability and overall costs. However, this legal process doesn’t mean that your life is ruined, as long as you follow the rules.