What-happens-to-a-director-during-company-liquidation

Find out how your role changes and what your responsibilities are

If your business becomes insolvent and you choose to enter liquidation or are compelled into liquidation by a creditor, it’s wise to get ready for what’s ahead. 

In liquidation, your responsibilities as a company director alter significantly. You won’t retain control over the company or its assets, nor can you act on its behalf. 

Nonetheless, you still hold a role. You’re required to assist the process by providing any necessary documentation or information to the liquidator and being available for an interview.

You might also need to attend meetings with the liquidator and help with selling the company’s assets.

 

How will I be affected by the company’s liquidation?

Closing any failing business is indeed a distressing period. You may have concerns about its financial implications for you and whether you’ll be eligible to operate another limited company in the future.

While it can induce stress, for most directors, liquidation is merely a path towards resolution. 

It might even offer a good opportunity, as the constant creditor pressure subsides, allowing you to start on a new chapter in your life. If you’ve conducted yourself appropriately in managing the company, the personal risks to you are minimal.

Throughout the process, an insolvency practitioner will assume control of the company, cease its trading activities, and convert the company’s assets into cash through ‘liquidation.’ 

The proceeds will then be allocated to repay the company’s creditors. Any outstanding liabilities that cannot be settled from the asset sales will be forgiven.

If you hold a contract of employment with the company and have worked at least 16 hours per week, you may qualify for directors’ redundancy pay. This could offer a valuable financial cushion during challenging times.

 

What would be a director’s responsibilities during liquidation?

When the company becomes insolvent and enters liquidation, your responsibilities as a director alter significantly. Neglecting to safeguard your creditors’ interests and adhering to the liquidator’s directives could result in personal liability problems and directorship disqualifications.

1. Hold a shareholder meeting

In the case of voluntary liquidation, the directors are required to convene a shareholder meeting to decide on the winding up of the company. If 75% (by the value of shares) consent to the resolution, this marks the commencement of the company’s closure.

2. Select a liquidator

Following the approval of the winding-up resolution, the directors have the authority to appoint an insolvency practitioner to serve as the liquidator. 

In Compulsory Liquidation, creditors may nominate a liquidator, or the duty may fall to the Official Receiver, who is the government’s appointed insolvency practitioner.

3. Cease trading when the company is insolvent

Your duties as a director undergo a significant change the moment you become aware that your company is insolvent (unable to settle its debts when they become due). 

During this stage, you must act in the best interests of the company’s creditors. Typically, this entails ceasing trading promptly to prevent worsening their situation.

It’s advisable to promptly contact an insolvency practitioner to assess whether halting trading aligns with the best interests of your creditors.

4. Cooperate and provide business records and paperwork

For the liquidator to effectively carry out their responsibilities, they will need prompt access to information concerning company assets and liabilities, employee details, creditors and suppliers, comprehensive records of company debts, and an updated balance sheet.

If you fail to provide company records and paperwork upon request, you may be required to do so by court order.

5. Agree to be interviewed by the liquidator

In the course of an insolvent liquidation, the liquidator may request an interview with the company directors. 

You are legally obligated to participate in the interview and respond to their inquiries. Failing to comply will prolong the process and heighten the likelihood of additional action being taken against you.

If you can demonstrate that you managed the business in line with your duties as a director, there should be no grounds for further pursuit against you.

 

Could I become personally responsible for company debts?

Although you have the freedom to resign from your role as a company director during the liquidation process, your obligations persist. 

The liquidator will continue to pursue you if you owe money to the company or are liable for any debts, including personally guaranteed loans. The liquidator will also scrutinise your actions leading up to the liquidation and hold you responsible for any misconduct or wrongdoing.

 

Is it possible to resign as a director during liquidation?

Typically, no. Your personal finances and the finances of the business are distinct, so you generally shouldn’t need to use your personal funds to settle company debts. 

However, there are certain situations where you might be held accountable:

  • You traded while the company was insolvent, accumulating more debts.
  • You participated in dishonest or fraudulent actions that resulted in additional debts.
  • You’ve personally guaranteed a company debt.
  • You possess an overdrawn director’s loan account that remains unpaid.

If necessary, the liquidator has the authority to pursue legal action to reclaim funds from you personally on behalf of the company’s creditors. This may jeopardise personal assets, including your car and even your house.

 

Can I run another company after liquidation?

Yes, you’re allowed to establish another company immediately following liquidation, provided the liquidator’s inquiry doesn’t reveal anything warranting a ban. 

If instances of wrongful or fraudulent trading are uncovered, you could face disqualification from serving as a company director for up to 15 years. Fortunately, such occurrences are uncommon.

Most directors can establish another limited company or continue operating an existing business post-liquidation. However, an important regulation to note is that you cannot establish a new business with the same or a similar name as the liquidated company for five years.

This practice is referred to as ‘phoenixing,’ which can cause confusion among creditors and create the perception that the business was liquidated solely to evade its debts.


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Are you thinking about liquidating your company?

The most effective way to safeguard yourself against any negative repercussions of liquidation is to seek guidance from an experienced insolvency practitioner as soon as your company becomes insolvent. 

They will assist you in evaluating your options and approaching the liquidation process appropriately.

Contact our team today for a complimentary, obligation-free consultation or locate your nearest office for an in-person meeting.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.