What Are the Consequences of Liquidating a Company
For many entrepreneurs, opening a company allows them to avoid personal liability for the trading debts of their business, and also to safeguard their personal assets in the unfortunate event of failure. For businesses that operate as a company entity, it is the company that owns all business assets, which also means that the company is responsible for any business debts and liabilities, not the directors. However, there are some instances where the creditors or suppliers could ask you to personally guarantee any pending company liabilities, making you legally liable for the payment of those specific debts according to the guarantee.
Given such a situation, if the company is unable to pay its debts, and the directors are also unable to repay, then the company may go into liquidation and even risk bankruptcy if the debts cannot be fully repaid. When facing financial pressure from creditors demanding payment, you may be forced to go into liquidation in one of two ways:
- The first way is by voluntary liquidation or resolution of the shareholders,
- And the second is by a court liquidation, when a court order is issued for your company to be wound up.
Once a company goes into liquidation, a liquidator is appointed by the court or shareholders to represent the combined interests of all creditors. This is a qualified and registered individual who’s responsible for supervising the company liquidation before the company can be dissolved. The duties of a liquidator involve:
- Identifying, gathering, and converting company assets into cash.
- Discharging the company’s liabilities.
- Distributing any remaining funds among shareholders as directed by the company’s constitution.
Whether the liquidation is voluntary or issued by the court, you are obligated to assist the liquidator by providing useful information about the company’s property, affairs, and dealings.
There are several consequences of putting a company into liquidation:
Shift of Administration Responsibility
Once your company goes into liquidation, the responsibilities for management and administration are passed on to the liquidator. As a director, you will no longer be in control of the business, though you will be required to assist the liquidator by providing the necessary information. Otherwise, the liquidator is free to steer the liquidation as they see fit. Since you will be handing control of your company over to the liquidator, any directors lose their voice in influencing the direction of the company operations.
Investigation of Company Situation
The liquidator will proceed to investigate your company’s business, affairs, and property, including finding any valuable assets that can be recovered for the creditor’s benefit. They will also investigate any claims that the directors may have, including those for:
- Breach of director’s duties.
- Failure to prevent the insolvent business from trading and going into debt.
They will also look into the existence of any transfer of recoverable assets that can help repay the creditors. If this process does not bankrupt you, the company’s liquidation should be able to resolve the indebtedness of the business to its creditors. However, it will have no effect on your separate individual debts or guarantees.
Assets Sold to Settle Company Debts
A liquidator is usually appointed because the business has become insolvent and is unable to pay its creditors. The role of this professional is to dispose of your business assets to pay back as much of the debt as possible.
Dismissal of Company Employees
Depending on the situation, the company may proceed with business operations for the sole purpose of completing the liquidation process. Otherwise, a liquidation order also functions as a notice for the dismissal of all company employees. That said, any employees on a fixed-term contract should be given a period of notice. If this is not possible, the employee may be entitled to damages for breach of contract.
All Legal Proceedings Against the Company Cease
Following a court liquidation, the court may choose to restrain or stay any proceedings against the company. Once the liquidator is identified and appointed, no creditor or other entity is supposed to continue or initiate legal proceedings against the company, or even in relation to its assets or property without the consent of the court or liquidator.
Distribution of Company Assets
As the liquidator attempts to raise funds from the disposal of company assets, they are aware of a hierarchy structure outlining the order in which liquidated company assets will be distributed among creditors. This structure is strictly enforced by the courts, with secured creditors having the first right to liquidated assets, so they are repaid before even considering the distribution structure.
The remaining debts are paid in order of priority:
- Beginning with the charges, costs, and expenses involved in the liquidation process
- Followed by salaries and wages payable to employees
- Third is unsecured creditors
- Any interest attached to company debts
- Any debt owed to company shareholders
Directors May Still Be in Debt
If the directors or other entities have personally guaranteed any of the business debts, the liquidator may chase those individuals to pay back. Even if the company is declared bankrupt, this decision won’t erase company debts that are personally guaranteed.
There are some trades where bankruptcy can lead to professional implications. For instance, bankruptcy in the building industry may cause you to be banned from operating in the industry for a period of three years. There are other industries with similar rules and penalties, so you should investigate the consequences of declaring bankruptcy in your specific industry before making the decision.
Unless you’re bankrupt, you and other directors should remain liable for your separate personal debts that are not tied to the business, such as your car loans, credit card debt, and any company debts that you guaranteed. You will also remain responsible for any debts that you owe the company, such as loans received from the company. Under any other circumstances, your personal finances should remain intact from the liquidation.
Liquidation due to business failure can lead to legally complicated issues such as potential asset recovery actions and fines against you for noncompliance with your legal obligations. As such, you should make sure to consult an appropriate professional as soon as you realize the dire financial situation of your company to help prevent the consequences of liquidation.
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