To the owner of a business that is struggling financially, the word “liquidation” can be terrifying. There are many myths about liquidation, which add to that fear, leaving owners and directors unsure as to their options or embarrassed to consider it. Owners in the North-East can make informed decisions if liquidation is necessary with the explanation of facts. Here are five common myths about liquidating a business, and behind each, the truth.
Myth 1: Liquidation Means Personal Bankruptcy for Directors
The big fear for many people is that if a business goes into liquidation, then their directors automatically go into personal bankruptcy. Thankfully, this is not usually the case. In most matters, limited businesses are separate legal entities from their directors and hence shield the directors’ personal assets from the company’s liabilities. This means that the directors are not personally liable for the company debts unless personal guarantees have been given or wrongful trading is carried out, such as knowing that the company is insolvent and still allowing it to trade.
The legal separation that a limited liability company provides enables the directors to close their businesses with minimum personal impact, especially if they act responsibly and promptly. Early engagement of a professional insolvency practitioner will, therefore, be able to help directors understand their position, minimise exposure, and avoid risks that may arise from delayed action
Myth 2: Liquidation prevents you from ever starting another business
One of the major fears for many business owners is that liquidation will shut their future entrepreneurial doors. This is a myth. The majority of directors can still initiate or operate other businesses after liquidation, provided they do not commit any wrong activities like fraud or wrongful trading. In fact, liquidation has been experienced by many successful entrepreneurs who continue to experience success with new ventures.
The regulatory bodies can only impose restrictions if one of the directors has been involved in repeated business failures due to malpractice. Liquidation is not a barrier for responsible directors. This myth can feel particularly limiting, but the truth is that liquidation doesn’t need to end a director’s business career; it’s just a tool to responsibly close one chapter before potentially opening anotherbands.
Myth 3: Creditors Will Harass You Personally During Liquidation
Another very common fear that often stops directors from taking the path of liquidation is that creditors will continue chasing them directly. The truth, however, is that if a company is in liquidation, creditors must legally contact the appointed liquidator and not the director. Among others, the job of a liquidator includes taking care of creditor communications, the distribution of the assets, and the settlement of the debts, all tasks that free the directors from direct contacts with the creditors during this challenging period.
Myth 4: Liquidation Destroys Your Credit and Reputation
Liquidation is an event over which one can be concerned that one’s reputation and credit score will seriously be in tatters. However, liquidation does not normally affect the directors’ personal credit scores since the agencies keep company and personal credit profiles separate. A single business liquidation usually isn’t of that much great concern to lenders either, provided it doesn’t appear there are recurring insolvency issues.
Myth 5: Liquidation means a complete loss for the creditors.
Another common myth is that liquidation leaves the creditors with nothing. The truth is a liquidator values the company assets, which consist of equipment, inventory, and property of the company, and converts those assets into cash, to be distributed to the creditors in an orderly and fair manner. The normal order of preference would include secured creditors and employees first, then unsecured creditors, if anything remains.
In a voluntary liquidation, the directors may well be in a position to work constructively with creditors by putting forward a proposal which might alleviate the debt burden or put terms to any closure. The earlier the action to initiate a voluntary liquidation is taken, the better the outcome both for the directors and the creditors seeking fair repayment. This myth can preclude directors from taking action, but in actual fact liquidation is structured to provide as much repayment as possible.
Business liquidation does not need to be daunting, nor a mystery surrounded by myth and misunderstanding. Those owners in the North-East who genuinely understand exactly what liquidation will really mean for them can make these types of decisions with confidence. We offer professional advice and support through the liquidation process, enabling clients responsibly and efficiently to work through each step. The correct support will give a means for the business owner to take an approach that can protect their good name and future opportunities alike. If you require professional consultation about this, call us today!