When a company goes into liquidation, the director of the company will be investigated to determine whether or not they were liable for the downfall of the company, or if any wrongdoing has occurred during their time of being director.
These investigations are compulsory, and the director has certain responsibilities they must undertake.
We’ve broken down the duties below for directors whose companies are insolvent, or headed in that direction.
What does liquidation mean for a director?
If you are a company director, and your company goes into liquidation, you will effectively lose all of your decision-making powers.
The courts will appoint an Official Receiver (OR) who will be in charge of the liquidation process. The company directors will be required to cooperate with the Official Receiver and provide all the information necessary to facilitate the liquidation process.
The Official Receiver will investigate the actions of the company director prior to the winding-up order.
Can a director resign from a company in liquidation?
Yes, you can resign as director while a company is in liquidation. However, your obligations to the liquidator will continue.
If you signed a personal guarantee during your directorship and the company had insufficient funds to pay back loans, you will be held liable and will be chased for the repayment. Until the money is paid back in full, or a settlement is agreed, the debt is your responsibility.
You should always ask to be removed from the personal guarantee once you have left the company prior to liquidation.
Can I be investigated if my company goes into liquidation?
Yes, you can be investigated as a director if your company goes into liquidation. As part of the liquidation process, Official Receivers can investigate the actions of company directors.
Each director can be asked to attend an interview with the Official Receiver in which they will be asked to provide a statement of affairs of the company, as well as discussing the events leading up to the company’s insolvency.
As a director, you must be prepared for the interview. You should have all relevant information, including accounts and statements.
You may also be requested to go to court by the Official Receiver for examination. This is rare and typically only used in situations where it’s suspected that there is severe misconduct on the part of the director.
Can you still be a director after liquidation?
Yes, formal directors can still act as a company director after liquidation if there has been no case of misfeasance.
However, there are a few restrictions. You must not use the same or similar business name as your previous company as it can lead to criminal action against yourself, as well as being held liable for all the debts of the new company should it go into liquidation.
If you were a director of a company in compulsory liquidation or in a Creditors’ Voluntary Liquidation (CVL), you can be banned for five years from forming or managing any business with the same or similar name to your liquidated company.
Can a director be personally liable for a company debt?
Many directors often believe that they are liable for the company’s debts; however, it is important to remember that the debt belongs to the company.
There are only a few exceptions where a director would be held personally liable, these include:
- A Personal Guarantee
- Overdrawn directors’ current accounts
- Using fraudulent means to accumulate debt
- Fraudulent trading
- Pension schemes
Can a director of a liquidated company be sued?
The general rule is that company directors cannot be pursued personally if the company has no money to pay you. However, the director will still be held personally liable.
Liquidators will pay themselves first, often leaving very little money to pay creditors who are to share any recovery.
There are exceptions however, to when creditors can go after directors personally to recover their loss. Creditors are typically ranked with different priorities in regards to repayments, and are known as secured and unsecured creditors.
What does a director need to be aware of when their limited company becomes insolvent?
Once a limited company has become insolvent, there are a few responsibilities that the director must undertake to ensure everything is legal.
You’ll need to speak to an experienced Insolvency practitioner, such as the team at The Insolvency Experts, to determine whether your company needs to cease trading immediately, or not.
This all depends on the current financial situation of the company and how it will affect the creditors.
If you are advised to cease trading, yet you continue doing so and the business cannot pay its debts, you and the other directors are liable to face investigation by the Insolvency Service.
You can find out more about the risks of trading whilst insolvent in our dedicated blog post.
Deliver all business records and assets to the liquidator
HMRC requires accurate and reliable information, and so do liquidators when they take control of the business from directors.
Having this information can help the liquidators establish the company’s financial position, how insolvency was reached and who was responsible for various functions.
Shareholders and creditor meetings
As a director, you should call a meeting with shareholders to agree on a “winding up resolution”. It is at this stage that you should decide to appoint a liquidator.
Within two weeks of passing the resolution, a meeting of creditors will be called. Directors must answer questions relating to the company’s situation.
Agreement to be interviewed by the liquidator
As previously mentioned, the liquidator may request for an interview with you and any other directors. You must comply with their request, answering all the questions truthfully and as fully as possible.
This will help to mitigate your risk of further action by the Insolvency Service, and your compliance also helps to speed up the liquidation process.
Insolvency Support for Company Directors
If you are a current director of a company and are experiencing or expecting insolvency and subsequent liquidation, get in touch with our expert team today at The Insolvency Experts to see how we can help you.
You can email us at email@example.com or call us on 01204 208162.