What are a Directors Duties and Responsibilities During Insolvent Liquidation?
When a company is insolvent or likely to become so, the primary duty of directors shifts to creditors, as opposed to shareholders. This is set out in the key insolvency legislation the Insolvency Act 1986.
The company must cease to trade immediately and safeguard its assets in the interests of the creditors. No one creditor can be prioritised over others, nor can any individual be paid ‘in preference’ or assets sold at less than fair market value.
Failure to act in a prescribed way could result in accusations of wrongful or unlawful trading further down the line during the insolvency practitioners investigation of directors conduct. Misfeasance accusations could result in a penalty, a director disqualification or even personal liability for a proportion of the company’s debts.
Acting responsibility from the moment you realise the company is insolvent is essential to removing the threat of personal liability.
- Key Directors Duties During Insolvency or Company Liquidation
- (1) Cease Trading When You Realise Company is Insolvent
- (2) Director’s Powers Cease
- (3) Hold a Shareholder Meetings
- (4) Appoint an Insolvency Practitioner
- (5) Director’s Duty to Prepare Statement of Affairs
- (6) Director’s Duty to Co-operate with Liquidator (Office Holder)
- (7) Company Directors Must Agree to be Interviewed by the Liquidator
- (8) Convening the Deemed Consent Procedure (Replaces Former Creditors Meeting)
- (9) Directors’ Loan Accounts
Key Directors Duties During Insolvency or Company Liquidation
(1) Cease Trading When You Realise Company is Insolvent
The moment you realise your company is insolvent, you should stop trading.
Do not send out any more products, issue any invoices, pay any staff, or attempt to seek finance.
Any action at this stage that is not in the clear interests of company creditors could put you at risk of accusations of wrongful trading as laid out in Section 214 of the Insolvency Act 1986.
Company liquidators (insolvency practitioners) have a legal duty to investigate the behaviour of directors during the period leading up to the liquidation.
Where wrongful trading can be proven, directors could face a disqualification order which would prevent serving as a company director for up to 15 years.
Where fraudulent trading is proven, more serious repercussions such as fines, penalties, and even a prison sentence are potential consequences.
(2) Director’s Powers Cease
As per Section 103 IA 1986, company directors case to hold directorial powers once the Insolvency Practitioner has been appointed, unless specifically instructed by the liquidator.
(3) Hold a Shareholder Meetings
Once the Ltd company has ceased trading, company directors must call a meeting of shareholders.
When the liquidation is voluntary, directors must call a meeting of shareholders to vote on the ‘winding up’ of the company. At least 75% of shareholders must vote to pass the special resolution, after which the company must notify Companies House using a form such as this one.
(4) Appoint an Insolvency Practitioner
Appointing a licensed insolvency practitioner (liquidator) is a legal requirement at this stage.
(5) Director’s Duty to Prepare Statement of Affairs
Preparing the Statement of Affairs in insolvency is one of the final key roles of the director and a key handover document to bring the IP up to date on the situation.
This document should breakdown the company’s current financial situation and include asset valuations, a recent balance sheet, a list of employees, creditors and suppliers, and full details of debts.
Where the liquidation is compulsory as opposed to voluntary, it will be the Liquidator or Official Receiver who prepares the SOA.
(6) Director’s Duty to Co-operate with Liquidator (Office Holder)
Limited Company Directors have a legal duty, once insolvent, to deliver any books and records and information that the liquidator requires for the purposes of his/her investigation.
If you refuse to do so, they can request the court to compel you into doing so, or to forcibly seize records.
(7) Company Directors Must Agree to be Interviewed by the Liquidator
As part of the liquidation proceedings, the liquidator may ask for an interview with the company directors.
You are legally obliged to attend the interview and answer the liquidator’s questions to the best of your ability.
If the interview gives the liquidator cause for concern about the way the business was run, or you fail to comply with the liquidator’s requests, allegations of misconduct could be made and may result in an Insolvency Service investigation.
(8) Convening the Deemed Consent Procedure (Replaces Former Creditors Meeting)
Formerly, directors would have called a meeting of creditors, but recent changes in the law have altered the process.
Now the director (convener) asks the IP to convene the ‘Deemed Consent Procedure’ which is a means of gaining the consent of creditors over various matters such as the appointment of the Liquidator.
Unless more than 10% of the creditors oppose, this will be deemed as consent to move forward.
(9) Directors’ Loan Accounts
Overdrawn directors’ loan accounts will usually be regarded as a debt in an insolvency situation that must be repaid for the benefit of the company’s creditors. In some cases, directors’ loans that have been written off in the company’s accounts can be reinstated by the liquidator.
This is often the case if the loan contributed to the demise of the company in any way.
If you are unable to repay the loan from your personal funds, you may have to follow a personal insolvency route such as an IVA or bankruptcy.
If the company accounts are such that the liquidator cannot determine the value of an overdrawn director’s loan, you could be investigated by the Insolvency Service.
How we help company directors
While the liquidator works to protect the best interests of your creditors, at Company Debt our priority is you.
We support company directors and provide the expert advice and assistance you need every step of the way.
In general, the limited company structure is there to keep a clear distinction between personal and corporate liability. There are exceptions where a director should get experienced advice, which include :
- The Director has Signed a Personal Guarantee – these documents are specifically designed to breach the corporate veil and force an individual to put a personal asset on the line as collateral for a company debt. Learn more about personal guarantees.
- Where there is evidence of wrongful or fraudulent trading – Where the director has ‘knowingly’ continued to trade after insolvency, he may be held personally liable for some or all of the debts. Learn more about wrongful trading.
Read our comprehensive article here on director’s personal liability for corporate debt.