Liability for company debts in liquidation

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Updated: 14th May 2021

Company Liquidation and Directors Responsibility: Can Directors Be Held Personally Liable for Debt?

Usually when a company is insolvent and about to be wound up, directors start feeling the pressure as they worry over what exactly their responsibilities will be during liquidation. In fact, there is a huge amount of weight placed on company liquidation and directors’ responsibility simply because the rules change during insolvency. Liquidating an insolvent company means that all proceeds go to creditors and little thought is given to compensating shareholders/members.

One thing to be conscious of is that an insolvent company MUST stop trading immediately OR the directors could be held personally responsible for any debts accrued during that period. Also, there may be a question of why the directors didn’t act reasonably or in a timely manner. Why did they continue to rack up the debts full-well knowing they couldn’t pay them?

Company Directors Liability Responsibilities

Another huge concern of company directors is in relation to company liquidation and director’s loan account. The short answer is that the director’s loan account is viewed as a debt owed to the company. If a company is in liquidation and the liquidator begins calling in debts, you can be sure he/she will target directors’ loans. That money will need to be collected without delay in order to distribute those funds to creditors.

If you are the director of an insolvent company, it is truly in your best interest to stop trading IMMEDIATELY. Don’t take a director’s loan and certainly stop purchasing on credit. Trading insolvent will raise a red flag to the possibility that directors were guilty of wrongful trading.

Liquidation of any type, compulsory or voluntary, must focus on dealing with debts in full before a company can be dissolved. It is the directors’ responsibility to make sure no new debts are added and that there is reasonable prospects of paying all debts from the liquidation (sale) of assets.

As a director of an insolvent company going into liquidation, you probably have a ton of questions about your liability and responsibility for your company’s debts. The insolvency specialists at Real Business Rescue can help you understand your role throughout this time and just where your liabilities begin and end.

And of course we can’t stress this enough – STOP TRADING IMMEDIATELY! Let us help you limit your personal liability which could be great if you don’t act reasonably and timely. Take the first step by getting professional guidance before it is too late. We are here to help so give us a call on 0800 644 6080 to schedule a free consultationWith 100 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

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