Unfortunately, in the current economic climate, it is a very difficult time for all businesses and a proportion of those must inevitably make the difficult decision to cease trading. When one is ceasing trading as a Limited Company, there are a number of important considerations to bear in mind.
One of the main advantages of limited liability is that, if your company runs into financial difficulties, it is possible to cease trading and in essence leave the debts of the company behind. This means that company creditors will not be able to pursue you or your family home, except in limited circumstances.
If the company is insolvent, within the meaning of the Companies Acts, 1963, it must be wound up. Insolvency means it is unable to pay its debts as they fall due. This is normally done by the company placing ads in the newspapers, holding a Directors meeting and holding a Creditors Meeting at which a Liquidator will be appointed. The Liquidator will then take over the administration of the affairs of the company and will take possession of all the company assets, equipment and bank accounts.
Unfortunately, for some directors, this may just be the start of their problems. If they have signed personal guarantees in relation to any of the debts of the company, those creditors will be able to pursue the directors personally, as if they did not operate a limited liability company at all. During the boom times, personal guarantees were signed almost without thought by directors and the sensible advice of their solicitors ignored. This is particularly to be noted in the current spate of cases before the Commercial Court by Financial Institutions on foot of such personal guarantees.
The Liquidator may also decide to pursue the directors through the Courts, seeking an Order from the Court that the directors be made personally liable for the death of the company, if he considers them to have traded fraudulently or traded recklessly to such a degree that their behaviour would warrant such application. The evidential tests for such an application are quite high, but the Courts are reviewing each case on its merits and making an appropriate decision. This author was involved in the recent PSK decision, representing the directors, in which they were found guilty and made liable for the debts.
Furthermore, the Liquidator may decide to bring proceedings against the directors, seeking to have them restricted from acting as directors for a number of years. While this may be regarded as inconvenient, the director having gone through the liquidation of his company, which is a far more stressful event, it will slow his personal and business recovery and make it difficult for him to return to a position of profitability expeditiously. This is particularly the case if he is planning to set up a further business or if he runs concurrent businesses whether in the same industry or otherwise.
The decision to liquidate a company should never be taken lightly, but if circumstances dictate that it must be done, it should be done swiftly and efficiently.
I often jokingly advise clients that the first two numbers on the speed dial of their mobile phones while they run a business should be their solicitor and their accountant, as they are the two most important advisors they will have as business owners, and that is never more so the case than in a case of a liquidation.