What are contingent liabilities when closing a company?

Shaun Barton

Shaun Barton | Company Closure Expert

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What are contingent liabilities when closing a company?

Contingent liabilities are ‘in the background’ of a company’s financial affairs but must be accounted for when closing a company. The requirement to pay a contingent liability depends on a currently unknown outcome, but one that could change a potential debt into an actual debt.

An employee tribunal claim is a common contingent liability, as are claims surrounding product defects and warranties. A creditor may also win a court claim for a debt that was previously disputed, even if the debt wasn’t expected by the directors to be payable.

Contingent liabilities are an important consideration when closing a company because they can tip a business that’s believed to be solvent into insolvency. So what effect can they have when closing down a company?

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.

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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.

Need to speak to someone?

With multiple offices across the UK and a vastly experienced team of business closure experts, you are never far away from the advice you need. Our Licensed insolvency practitioners provide free consultations to all directors and shareholders, and can quickly ascertain which closure method is best for your business.

We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.

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