It can be difficult to accept that a company has reached the end of the road.
Sometimes, a business closure is largely outside of a Director’s control. For others, a series of strategy calls that looked sound on paper don’t pan out the way they hoped.
Whatever the reason, it’s hard not to take a business closure personally. But winding up a company the right way can make a significant difference to what happens next.
John Bell, Founder of company liquidation firm Clarke Bell, explains common myths about company liquidation, and why taking them at face value can cause delays and make the entire process more difficult.
Liquidation Means I’ve Failed
Having a business that you’ve poured a lot of time and effort into can feel like a personal shortcoming, but most of the time, that’s simply not the case.
Except in cases of misconduct, where a Director has failed in their duties, liquidation is rarely a verdict on you as a person. It is a legal process for bringing a company to an orderly end when it cannot continue or has reached a natural close.
A company can fail for many reasons, including a major customer leaving, unpredictable cash flow, price undercutting by competitors, rising expenses, or the market simply moving on.
Sometimes, Directors also have to accept that certain commercial decisions did not pay off. But that does not automatically mean they acted improperly.
In fact, how you deal with it says a lot more about your character. Treating liquidation as a process rather than a personal failure makes it easier to think objectively about what you need to do and act decisively instead of dragging out a situation that won’t improve.
I’ll Never Be Allowed to Be a Director Again
On its own, liquidating a company does not prevent you from being a Director in the future. Many Directors close a company and later start, buy, or manage another.
What will prevent you from being a Director is disqualification by the Insolvency Service. Directors can be banned for up to 15 years if their conduct makes them unfit to be involved in the management of a company. Some of the most common examples of unfit conduct are:
- Continuing to trade when a company is insolvent (it cannot pay its debts)
- Failing to keep accounting records, pay taxes, or send returns to Companies House
- Using company assets for personal expenses
- Fraud.
Director conduct is automatically reviewed when a company enters insolvency proceedings. This does not mean the Insolvency Service will always conduct a formal investigation.
The Insolvency Service is less concerned with the fact that a company failed and more with how a Director has acted.
If a Director seeks advice, immediately ceases trading when it’s clear they cannot pay their debts, files returns on time, and appoints an insolvency firm as early as possible, disqualification is unlikely.
But ignoring your obligations because you believe you won’t be able to be a Director again is what makes this myth so potentially damaging. If you continue taking deposits and fulfilling orders despite there being no reasonable way to avoid insolvency, the outcome you’re trying to avoid becomes almost inevitable.
Voluntary Liquidation Is the Same as Being Shut Down by Creditors
Insolvent companies can enter liquidation via several routes. The preferred process is a Creditors’ Voluntary Liquidation (CVL), which is initiated by a company when it accepts that it cannot pay its debts.
Compulsory Liquidation is different. This procedure typically begins when a creditor files a Winding Up Petition with the court to forcibly close the company.
Letting your company enter Compulsory Liquidation is rarely the best option, as it can impact your credit rating, reputation, and relationship with banks, accountants, and solicitors. It also gives you less control over the process, as, unlike with a CVL, you cannot appoint a chosen Insolvency Practitioner.
A CVL allows Directors to take steps before a creditor forces the issue. You will not automatically be disqualified if you enter Compulsory Liquidation, but it can make the process more difficult. The Insolvency Service may look more favourably on Directors who have recognised their company’s position and taken steps to deal with creditors properly.
It’s Easier to Wait It Out
Doing nothing can feel easier in the short term. But once a company is in financial difficulty, delays can reduce the options available and increase risk.
Cash flow pressure is sometimes unavoidable, and many companies recover. But it’s a different issue when an overdraft Director’s Loan Account continues to grow, HMRC arrears build, and it becomes clear there’s no reasonable way to turn the tide.
Directors who ignore concerns don’t just risk being forced to close, but also investigations into misconduct.
Seeking advice early does not mean you are being gung-ho, committing to liquidation, or resigning yourself to the fact that there’s no way back. It might be that there is a viable route to solvency. But when recovery looks unlikely, the safest and most responsible step may be to close the company before the situation deteriorates.
For Directors who have put so much into building a company, insolvency can be difficult to accept. These myths might make it a little easier to justify not taking action. Still, the reality is that liquidation is far less painful when Directors understand where the line is and take initiative when the warning signs begin to show — before the decision is taken out of your hands.
