How can contingent liabilities affect company closure?
There are three main ways to close a company in the UK – Members’ Voluntary Liquidation (MVL), company dissolution, and Creditors’ Voluntary Liquidation (CVL). The suitability and progress of these procedures can be affected if contingent liabilities exist.
Members’ Voluntary Liquidation
In the case of solvent liquidation, contingent liabilities can negatively affect the company’s ability to repay all of its creditors within the 12-month timescale required. Directors have to officially declare their company solvent, as this is the basis for entering the process.
In doing so, they should have reviewed the company’s financial position in detail and taken into account any contingent liabilities. If a contingent liability does materialise and results in the business being unable to pay all of its debts, it can have serious repercussions for directors personally.
Company dissolution
The same outcome can apply to company dissolution – also known as company strike off – whereby directors close down their business without professional assistance but must declare solvency. They may believe their business has repaid all its debts and is in a positive financial position before closing.
If an employee’s claim for unfair dismissal hasn’t been resolved, however, or a customer wins an unresolved product liability case, the typically substantial sums that become due from such claims may render the company unable to pay.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is the process used to close a business that’s already insolvent. The crystallisation of a contingent liability can severely worsen its debt situation and potentially affect directors’ finances if misconduct is found.
What are the potential implications of contingent liabilities for company directors?
Company directors can be held personally liable for the business’s debts in some instances – if they’ve taken an unusually high salary or an unlawful dividend that’s contributed to the failure of their business, for example.
Director disqualification is also a possible outcome, and the ban can last for up to 15 years. Including contingent liabilities in your company’s financial statements presents a truer picture of its financial position and protects you from potential liability and other serious sanctions.
Company Closure can provide further guidance on contingent liabilities and how they can affect the situation when closing or liquidating a company. We offer free, same-day consultations and work from a nationwide network of offices.
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