What Happens to a Director of a Company in Liquidation?

When a company enters liquidation, directors find themselves in challenging territory. Your responsibilities change while you work with the insolvency practitioner to help close the company.

You may also find yourself investigated during this process to see if any of your actions left creditors worse off.

We’ll explain the role and responsibilities of directors in much more detail below, as well as the potential consequences of any wrongdoing.

What Does Liquidation Mean for a Director?

As a director, liquidation transforms your role from managing day-to-day operations to fulfilling specific legal duties aimed at winding down the company. You will no longer control the company’s assets or its business activities. Instead, your focus shifts to supporting the liquidation process by providing necessary documentation and facilitating the sale of assets, all under the guidance of an appointed liquidator.

There’s also a personal side to consider: you should expect personal guarantees against company loans to be called in, and it’s possible you might be asked to fund the liquidation yourself if the corporate assets don’t cover it.

You should also be aware that the liquidator has a duty to investigate directorial conduct in the period preceding insolvency. If any misfeasance is discovered during the process, it could result in consequences for you personally.

Key Responsibilities of Directors During Liquidation

Cease Trading

Your first action upon realising the company is insolvent should be to cease all trading activities. Continuing to trade once insolvent risks worsening the financial situation for creditors and exposing you to personal liabilities. It’s imperative to act in the creditors’ best interests, which usually means halting operations to prevent further losses.

Hold a Shareholder Meeting

If you’re considering voluntary liquidation, convening a meeting with the company’s shareholders is a necessary step. Here, you’ll present the situation and propose liquidation as the course of action. Achieving a 75% agreement (by share value) from the shareholders is needed to pass the resolution for winding up the company.

Appoint a Liquidator

Following the shareholders’ approval, your next responsibility is to appoint a licensed insolvency practitioner (IP) as the liquidator. The liquidator’s role is crucial—they take over the company’s affairs, liquidate assets, and use the proceeds to repay creditors. In cases of compulsory liquidation, creditors or the court might appoint the liquidator.

Work with the Insolvency Practitioner

Once a liquidator is appointed, your role shifts to supporting their efforts. This means providing full access to the company’s books, records, and any other information they need. Expect to assist in asset identification and valuation and possibly in communicating with creditors.

Agree to be Interviewed by the Liquidator

Director interviews conducted by the liquidator are a crucial aspect of the liquidation process. These interviews allow the liquidator to gain insights into the reasons behind the company’s failure, the accuracy of its financial records, and any potential irregularities or wrongful actions.

What Are a Directors’ Legal Responsibilities in Liquidation?

When a company faces liquidation, the roles and responsibilities of its directors shift significantly. Your primary objective is protecting creditors’ interests, and the law imposes strict guidelines to ensure fairness and transparency in the liquidation process.

Protecting Creditors’ Interests

From the moment of insolvency, safeguarding the interests of your company’s creditors is the single most important part of your role as a director. This understanding should guide all directorial behaviour, underscoring the necessity for honesty, transparency, and diligence in your actions.

Here are some of the ways you can do this

• Ensure all financial statements are current, comprehensive, and correct.
• Avoid paying off favoured creditors or settling debts with friends, family, or associates in preference to others. The law requires an equitable approach to debt repayment, where all creditors are treated fairly according to the legal hierarchy of claims.
• Work closely with the liquidator, providing all necessary documentation and information without delay.
• If you, as a director, have borrowed money from the company in the form of a director’s loan, prioritise repaying these loans before the company enters liquidation. This action reduces the company’s liabilities and increases the funds available to creditors.

Can a Director Resign During Liquidation?

Resignation as a director during liquidation is a possibility, but it doesn’t absolve the individual of their obligations to the liquidator. If the director signed a personal guarantee and the company lacks funds for loan repayment, the responsibility remains with the director.

It’s imperative to understand that leaving the company does not mean leaving behind the liabilities tied to it. Ensuring proper removal from any personal guarantees prior to liquidation is a prudent step.

Directors Investigations During Company Liquidation

When a company goes into liquidation, it is standard procedure for the liquidator to conduct an investigation into the company’s affairs, including the actions of its directors. This investigation aims to determine whether the directors have fulfilled their legal and fiduciary duties leading up to the liquidation. It involves examining the company’s financial transactions, decision-making processes, and compliance with legal obligations in the period preceding insolvency.

Directors who have acted responsibly and in compliance with their duties are unlikely to face any negative outcomes. However, if the investigation uncovers wrongdoing, such as trading while insolvent, failing to keep accurate financial records, or not acting in the creditors’ best interests, it could lead to legal action or disqualification from serving as a director in the future.

When Can a Director Be Made Personally Liable for Debts in a Liquidation?

In general, directors are not personally liable for their company’s debts in liquidation because a limited company operates as a separate legal entity from its directors and shareholders. This separation means that, in most cases, directors are protected from being held responsible for the debts of the business.

However, exceptions arise where directors could face personal liability: if you’ve:

• signed personal guarantees
• are found to have continued trading during insolvency without minimising loss to creditors (wrongful trading)
• were involved in fraudulent activities leading to the company’s debts (fraudulent trading).

Overdrawn director’s loans must also be repaid because this money is essentially the company’s, not the director’s personal funds, and needs to be returned to help pay off the company’s debts.

If misconduct is found, directors can face disqualification, in addition to personal liability for the company’s debts, and, in cases of fraudulent trading, criminal prosecution.

» MORE Read our full article on What Happens to My Overdrawn Director’s Loan Account in Liquidation?

Can a Director Be Made Bankrupt Because of Their Company’s Liquidation?

Yes, a director can be made bankrupt as a result of their company’s liquidation if they have provided personal guarantees for the company’s debts and the company is unable to fulfil these debts.

Can a Director Run a Business Again After Liquidation?

Yes, a director can run a business again after a previous company’s liquidation. There is no automatic disqualification for directors simply because a company has gone into liquidation. However, certain conditions and restrictions may apply.

Can a Director Start Another Business After Liquidation?

Starting a new company after liquidation is indeed possible for a director, but there are important considerations to keep in mind:

• Under the Insolvency Act, using the same or a similar name to the liquidated company is restricted.
• If a director has been disqualified for conduct in the lead-up to the liquidation, they cannot act as directors or be involved in the formation, management, or promotion of a company during the disqualification period.

Can a Director of a Liquidated Company Be Sued?

Yes, directors of a liquidated company can be sued, particularly in cases involving misfeasance, wrongful trading, fraudulent trading, or if they’ve provided personal guarantees for company debts.

Are you Considering Liquidating Your Company?

If your company is facing liquidation, it’s important to seek expert advice and support.

At Company Debt, we specialise in providing insolvency support for company directors. Our team of experienced professionals can guide you through every step of the process, helping you understand your options and responsibilities.

Whether you’re dealing with overdrawn director’s loans, concerned about personal liability, or unsure about starting a new business after liquidation, we’re here to help.

FAQs on Company Liquidation and Director Responsibilities