Question Tag: Company Winding-Up

Consequences of private/voluntary liquidation include:

• Investigations may be opened: The greatest disadvantage to the voluntary liquidation of an insolvent company is an investigation into conduct. Upon appointment, an insolvency practitioner must open an investigation into the conduct of directors. This aims to determine why the company fell into such financial distress, and whether directors had a hand to play in it. This investigation will require anything relevant to the company and the actions of its directors. If a director is found to have engaged in wrongful trading, harsh legal penalties can be applied, including being barred from acting for up to 15 years, barred from other management positions, and held personally liable for the debt.
• Directors can be held personally liable for company debt: Following an investigation, if it is found that a director engaged in wrongful trading or closed the company quickly to evade debt, they may be held personally liable. Additionally, if a director has signed a personal guarantee, their creditor can enforce it to receive payment.
• All assets will be liquidated: Once a company enters liquidation, the appointed insolvency practitioner must sell off all assets to raise funds. This includes even those assets the directors may want to keep. These funds will then be distributed among creditors, shareholders, and used to pay any other liabilities.
• Staff will be made redundant: As the company is to be closed, all employees must be made redundant. They may be able to claim redundancy pay and other statutory benefits.
• Retained profits are passed to the shareholders in a tax-efficient way: If a director were to simply dissolve their company, they would need to distribute the assets of the company among themselves in advance. Because this is done as a normal day-to-day transfer to the shareholder, it is taxed like any dividend would be. For those with high earnings, the tax paid on this distribution can be significant.

(5 points @ 2 marks each = 10 marks)