What are a Directors’ Responsibilities During Liquidation?
Director responsibilities in liquidation must be managed sensitively. Failure to act in a prescribed way could result in accusations of wrongful or unlawful trading further down the line. The result of which could be a penalty, a director disqualification or even personal liability for a proportion of the company’s debts.
Once a company becomes insolvent, the directors’ responsibility shifts from being to the company’s shareholders or members, to its creditors. The company must cease to trade immediately and safeguard its assets in the interests of the creditors. Acting responsibility from the moment you realise the company is insolvent is essential to removing the threat of personal liability.
The six responsibilities of directors of limited companies in liquidation.
Cease Trading When You Realise Company is Insolvent,
The first thing company directors must do to cease trading as soon as they realise the company is insolvent. This has an extremely important part to play in reducing your risk of accusations of wrongful trading under the Insolvency Act 1986.
As well as ceasing to trade, the company should not take on any new borrowings or sell any assets. If you continue to trade and rack up further creditor liabilities, you could be made personally liable for the repayment of those debts. There will also be a rigorous investigation which could end up in a directorship ban, financial penalties and even a prison sentence.
Hold Shareholder and Creditor Meetings
Once the company has ceased trading, company directors must call a meeting of shareholders. 75 percent of the shareholders (by value) must agree to the winding up of the company. A liquidator can then be appointed, and the winding up resolution can be sent to Companies House and advertised in The Gazette.
The next job is to call a meeting of the creditors, which must be done within two weeks of the winding up resolution being passed. The directors must attend the meeting and answer question relating to the company’s situation from any creditors that attend. A statement of affairs describing the company’s financial position must also be presented.
Deliver up Business Accounts, Paperwork and Assets
Next on the company director’s to-do list is to deliver up information relating to the company’s finances and assets to the liquidator. This paperwork will also need to be sent to HMRC. The liquidator will use this information to establish the company’s position, how the point of insolvency was reached, and who was responsible for different areas of the business.
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.
Personal Guarantees Can Lead to Personal Liability
Any personal guarantees you have given as a director could leave you personally liable for debts the company is unable to repay. This is potentially extremely serious as it could put your personal finances and assets at risk.
However, a personal guarantee for a business debt remains unsecured and does not become a secured debt simply because the company is entering liquidation. The only exception is if the personal guarantee is supported with a charge on the company assets (a debenture). This would make the debt secured.
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.
How can we help?
While the liquidator works to protect the best interests of your creditors, at Jameson, Smith & Co., our priority is you. We support company directors and provide the expert advice and assistance you need every step of the way. To learn more about how we can help UK directors in distress, please call 08000 746 757 or email: firstname.lastname@example.org.