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What happens to a director during company liquidation?
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Find out how your role changes and what your responsibilities are
If your business is insolvent and you decide to enter into liquidation or are forced into liquidation by a creditor, it’s a good idea to prepare yourself for what’s coming. During the liquidation procedure, your role as a company director changes dramatically.
You will no longer have control over the company or anything it owns or be able to act on its behalf. You do still have a role, however. You will be expected to facilitate the process by handing over any documentation or information the liquidator needs and making yourself available for an interview. You may also be required to attend meetings with the liquidator and assist with the sale of the company’s assets.
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Closing any failing business is undoubtedly a distressing time. You may have worries about what it means for you financially and whether you’ll be able to run another limited company in the future.
Although it can be stressful, for the vast majority of directors, liquidation is simply a means to an end. It can even be a positive experience, as the constant creditor pressure will cease and you’ll be able to start a new chapter in your life. As long as you have acted properly in the running of the company, the risks to you personally are small.
During the process, an insolvency practitioner will take control of the company, the business will cease trading and the assets of the company will be ‘liquidated’ i.e. turned into cash. That money will be used to repay the company’s creditors. Any remaining liabilities that cannot be repaid from the sale of assets will be written off.
If you have a contract of employment with the company and have worked a minimum of 16 hours a week, you could even be eligible for directors’ redundancy pay. That can provide you with a much-needed financial buffer in troubled times.
Your duties as a director change when the company becomes insolvent and enters liquidation. Failure to protect your creditors’ interests and comply with the liquidator could lead to personal liability issues and directorship bans.
Cease trading when the company is insolvent
The shift in your responsibilities as a director starts as soon as you become aware that your company is insolvent (can no longer pay its debts when they’re due). At this point, you must act in the best interests of the company’s creditors. Usually, that means ceasing training immediately to avoid worsening their position.
You should contact an insolvency practitioner immediately to determine whether ceasing trading is in the best interests of your creditors.
Hold a shareholder meeting
If the liquidation is voluntary, the directors must call a shareholder meeting to vote on the winding up of the company. If 75% (by the value of shares) agree to the resolution, this is effectively the beginning of the end of the company.
Appoint a liquidator
Once the winding up resolution has passed, the directors can appoint an insolvency practitioner to act as the liquidator. In Compulsory Liquidation, the creditors can nominate a liquidator or it may be the job of the Official Receiver (the government’s insolvency practitioner).
Co-operate and handover business records and paperwork
To do their job properly, the liquidator will require timely information about company assets and liabilities, employees, creditors and suppliers, full details of company debts and an up-to-date balance sheet.
If you do not provide company records and paperwork when requested, you could be compelled to do so by the court.
Agree to be interviewed by the liquidator
As part of an insolvent liquidation, the liquidator may ask for an interview with the company directors. You are legally obliged to attend the interview and answer their questions. Failure to do so will delay the process and increase the risk of further action against you. As long as you can show that you ran the business in accordance with your duties as a director, there should be no reason to pursue you further.
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You are free to resign from your position as a company director during the liquidation process, but it doesn’t bring your obligations to an end. The liquidator will still pursue you if you owe the company money or are liable for any debts, such as loans you guaranteed personally. The liquidator will also investigate your conduct in the time leading up to the liquidation and hold you accountable for any wrongdoing or misconduct.
Ordinarily, no. Your personal finances and the finances of the business are separate, so you shouldn’t have to use your own money to pay company debts. That said, there are some circumstances where you could be made liable:
- You have signed a personal guarantee for a company debt
- You have an overdrawn director’s loan account that you have not repaid
- You continued to trade when the company was insolvent and incurred further debts
- You engaged in dishonest or fraudulent conduct that created additional debts
Where necessary, the liquidator can take legal action to recover money from you personally on behalf of the company’s creditors. That can put personal assets, such as your car and even your house, at risk.
Yes, you are free to run another company immediately after the liquidation, as long as the liquidator’s investigation does not uncover anything that could lead to a ban. If they find examples of wrongful or fraudulent trading, you could be disqualified from acting as a company director for up 15 years. Fortunately, this is quite rare.
Most directors can set up another limited company or continue trading an existing business after liquidation. An important rule here is that you cannot set up another business with the same or a similar name as the liquidated company for five years. This is called ‘phoenixing’ and it can lead to confusion among the creditors and give the impression that the business was liquidated simply to escape its debts.
The best way to protect yourself against any adverse effects of liquidation is to get advice from an experienced insolvency practitioner as soon as your company becomes insolvent. They will help you consider your options and approach the liquidation in the right way. Call our team today for a free, no-obligation consultation or find your nearest office for a face-to-face meeting.
Further Reading on What happens to a director during company liquidation?
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