How can contingent liabilities affect company closure?
There are two main ways to close a solvent company in the UK – Members’ Voluntary Liquidation (MVL) and company dissolution. 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. As part of the MVL process, a statement of affairs will be drawn up which must detail all known assets and liabilities of the company to determine whether it is indeed solvent. It is important that any contingent liabilities are accounted for at this stage.
Directors have to officially declare their company solvent, as this is the basis for entering the process. It is considered an act of perjury to falsely swear a declaration of solvency, so you should ensure you consider all possible contingent liabilities before going ahead.
If a contingent liability does materialise during the MVL, and results in the business being unable to pay all of its debts, the MVL will need to be converted into an insolvent Creditors’ Voluntary Liquidation (CVL) process.
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. While strike off is a viable closure method, it is only suitable for companies which are solvent. Even if a director believes their company has repaid all its debts and is in a positive financial position before strike off, contingent liabilities could later come to light.
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.
What are the potential implications of contingent liabilities for company directors?
The emergence of contingent liabilities can have huge repercussions to the viability of an ongoing liquidation process. A solvent liquidation by way of an MVL will simply not be allowed to continue if contingent liabilities emerge which render the company insolvent.
This is why it is important to consider any outstanding or ongoing litigation proceedings which could lead to a liability against the company at a later date. If you are considering placing your company into solvent liquidation, and are concerned about the potential of contingent liabilities, the experts at Company Closure can provide further guidance on this and how these types of outstanding liabilities 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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