Key takeaways
- Small businesses often turn to a liquidator without a full picture of what they do.
- A liquidator works on behalf of a company’s creditors rather than the company itself.
- You should understand your current financial position and potential liabilities before speaking to a liquidator.
- Liquidators are heavily regulated, there are public records of any fines or sanctions available to view.
- Contact your accountant, Business Debtline or a company director specialist for independent guidance before deciding on a liquidator.
The emotional toll of closing a business
As many small business owners will know from experience, running a company can be a lonely and stressful journey – especially when financial difficulties arise.
Directors often pour their heart and soul into their business, so when the times comes to make the difficult decision to close their company, the emotional toll can be overwhelming. Stress, uncertainty, and a desperate search for solutions, can quickly take hold, clouding their decision-making.
It’s in that moment that many business owners turn to a liquidator to act on their behalf. But this is where a critical misunderstanding can sometimes arise and one that can have serious personal consequences.
The truth is that a licensed insolvency practitioner (IP), when appointed as a liquidator, does not work for the director. As part of their statutory duties, a liquidator acts on behalf of the company’s creditors, not the company or its directors. Their primary responsibility is to realise any remaining company assets and distribute those funds to creditors in line with insolvency law. Alongside this, they are legally obligated to investigate the conduct of the directors leading up to the insolvency.
This is often unknown by many business owners and can lead to issues in cases where a director may have an overdrawn Director’s Loan Account or unknowingly breached their duties. These are situations that, once uncovered during a liquidation, can result in the liquidator pursuing the director personally for repayment or misconduct.
Being aware of this prior to liquidation is of paramount importance to help avoid any personal implications.
Clarifying a misunderstood process
At The Director’s Helpline, we speak to hundreds of SME owners every month. One of the most common things we hear is that this dynamic is rarely explained clearly to business owners before they proceed, leading to costly misunderstandings and, in some cases, serious personal consequences.
It’s rarely explained upfront that, once a liquidation is underway, a business owner is no longer the client. The focus shifts to representing the creditor, and if any red flags appear in the company’s financial history, business owners can find themselves under scrutiny.
That’s why it’s vital for any director considering liquidation to understand their current financial position and any potential liabilities before they appoint a liquidator. That includes reviewing any personal guarantees, unpaid taxes, or money drawn from the company that hasn’t been repaid.
Getting clarity and impartial guidance first can mean the difference between closing down cleanly or facing months of claims, stress, and unexpected legal demands. In many cases, insolvency may not even be the answer.
With guidance, directors can clearly see the options they have and make decisions on what’s best for themselves and their company based on fact.
The importance of looking beyond cost
Liquidation costs are another area that’s often misunderstood. Typically, there are two main fee stages in a voluntary liquidation.
The first is the statement of affairs fees which is the report produced before liquidation that outlines the company’s financial position. The second is the post-appointment fees, charged for the liquidator’s work in winding up the company, usually billed on a time-cost basis and deducted from any assets recovered.
One of the biggest mistakes a director can make is fixating only on the headline cost of liquidation.
There are some companies out there offering low-cost liquidation offers, but it’s important to remember that low-cost doesn’t mean low risk. Many come with hidden commercial risks for the director appointing them.
In many cases, liquidators are paid through time-based billing – often deducted from any company assets or funds they recover. If the company has no assets, however, some may look to raise funds through other means, including pursuing directors personally for any money owed, such as overdrawn loan accounts.
This isn’t to suggest malpractice, as liquidators are legally bound to report on directors’ conduct and pursue any recoverable funds. But it does mean there can be perceived conflicts, especially when the same party investigating a director’s actions is also financially benefiting from any claims against them.
But like any industry, there are good insolvency practitioners and, unfortunately, less scrupulous ones.
Therefore, directors should be doing their research and exercising due diligence to instruct the right liquidator – not the one which costs the least.
As liquidators are heavily regulated, there are public records of any fines or sanctions available to view. So, if a director is considering working with an IP, it’s crucial to always research their background, check their regulatory record, and ensure they take time to explain their role clearly.
Because the truth is that if business owners get it wrong, it could cost them a whole lot more in the long run.
Seeking independent guidance first
In today’s challenging economic climate, many directors are entering liquidation without full knowledge of the process and consequences. Some are persuaded by price, others by urgency, but few are given clear, impartial guidance before they make any formal move.
In reality, a simple misunderstanding could cost business owners their livelihood, so it’s vital that before appointing a liquidator, directors have all the facts. Only then can they make informed decisions that protect both their business interests and their personal position.
It’s good practice to seek independent advice before you find a liquidator. This could be your accountant or a charity such as Business Debtline or the Money Advice Trust.
Alternatively, you can contact The Director’s Helpline. We exist for one purpose – to help directors understand their options before making any binding decisions.
We’re not an insolvency firm, and we don’t push any particular outcome. We’re director-first in our approach and our service is free, confidential and non-commercial, funded by a carefully vetted professional panel that we refer to only when, and if, a director decides to proceed.
We help directors to assess any personal risks, understand how a liquidation will affect them, and present all the viable options, so they can take their next steps confidently.
Jonathan Cooper is founder and director of The Director’s Helpline and The Director’s Choice.
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