I’ll explain what you should expect as the director of a company entering liquidation, including the way your duties and responsibilities change[1]Trusted Source – GOV.UK – What happens to directors.
When a company goes into liquidation, and a liquidator is appointed[2]Trusted Source – GOV.UK – What the liquidator does, directors face significant shifts in their roles and responsibilities. Here’s what you should expect:
You’ll lose control of the company: Once an insolvency practitioner (IP) is appointed as a liquidator, you’ll lose control over the company and its assets.
You’ll have to help the liquidator: You’ll need to cooperate with the IP by providing any requested information, handing over the company’s assets, records, and paperwork, and allowing the liquidator to interview you if necessary.
You might face consequences: If the liquidator determines that your conduct in the period preceding the insolvency was ‘unfit’, you can face severe repercussions. In the most serious cases, this includes being banned from holding directorship positions for a period of 2 to 15 years.
What Are a Director’s Legal Responsibilities During Liquidation?
As a director of a company undergoing liquidation, you still have important duties and responsibilities, even after the IP takes control of the company’s affairs. Here’s what will be expected of you during this process:
Cease Trading
Once you’ve made the decision to liquidate, you must stop trading immediately. Continuing to trade can lead to accusations of wrongful trading, which means you failed to put creditors’ interests first.
Cooperate with the Liquidator
You must provide the IP with all company books, records, and information they request.
Protect Company Assets
You must ensure that all assets are accounted for and handed over to the liquidator. This includes securing physical and intangible assets and preventing any disposal or concealment.
Avoid Misconduct
During this period, it’s vital that you don’t conceal or dispose of company property, falsify documents, or engage in any fraudulent behaviour related to the liquidation. The liquidator may reverse payments made to specific creditors, which can be seen as giving them preferential treatment.
Attend Interviews
The liquidator will likely require you to attend interviews to investigate the company’s dealings and insolvency causes. It’s important you answer questions truthfully.
Help the IP with the Statement of Affairs
As a director, you will likely need to help the IP create a sworn Statement of Affairs detailing the company’s assets, debts, and other information.
How Will Liquidation Affect Me as a Director?
For most directors we work with, liquidation is ultimately a relief and a chance to close a company in an organised way, backed up by professional support.
Liquidation means you no longer have to steer the ship as you get the support of insolvency practitioners to deal with the mechanics of closure.
You no longer have to field angry calls from creditors, or juggle cash flow but can focus on your next chapter.
As long as you’ve acted in the best interests of the company, the risks to you are small, as I’ll explain below. The liquidators will call upon you for information and support for the best part of a year before the process ends and the company ceases to exist.
Can Directors Be Investigated as Part of the Liquidation?
Yes, directors can absolutely be investigated as part of a company’s liquidation process. Part of the liquidator’s role is to study directors’ actions and decisions, especially in the period leading up to the company’s insolvency, to ensure fair play for creditors.
This investigation is crucial to identify any potential instances of wrongful trading, breach of fiduciary duties, or fraudulent or preferential transactions that may have occurred under your watch.
If the liquidator finds evidence of misconduct or negligence, they can hold you personally liable and recover assets for the creditors.
Can a Director Resign During Liquidation?
Resignation as a director during liquidation is possible, but it doesn’t mean you won’t still have obligations to the liquidator.
For example, if you’ve signed a personal guarantee and the company lacks funds for loan repayment, the responsibility remains with you.
Can a Director Be Made Personally Liable for Debts in an Insolvent Liquidation?
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 can lead to legal action or disqualification from serving as a director in the future.
Typical cases where you could face personal liability include:
if you’ve signed personal guarantees
if it’s found you continued trading during insolvency without minimising loss to creditors (wrongful trading)
if you were involved in fraudulent activities leading to the company’s debts (fraudulent trading).
NB: Overdrawn director’s loans must also be repaid because this money was always the company’s and thus becomes an asset. If you’re concerned about this, the liquidator may be able to discuss writing this off in some cases but you’ll need to discuss it
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 you’ve provided personal guarantees for the company’s debts, or where it’s found you placed other interests before those of creditors.
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 simply because a company has gone into liquidation. However, certain conditions and restrictions do apply, as I’ll explain below.
Can a Director Start Another Business After Liquidation?
Starting a new company after liquidation is possible for a director, but there are important considerations to keep in mind[3]Trusted Source – GOV.UK – Re-use of company names:
Under the Insolvency Act, using the same or a similar name to the liquidated company is restricted.
Directors who have been disqualified 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 you’ve provided personal guarantees for company debts.
Expert Advice is at Hand from the Company Debt Team
If your company is facing liquidation, seek expert advice and support as soon as possible from our team of friendly experts.
At Company Debt, we specialise in providing insolvency support for company directors. Our team can guide you through every step of the process, and help 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
Is a Director Automatically Disqualified if Their Company Goes into Liquidation?
No, directors are not automatically disqualified when their company enters liquidation. Disqualification depends on their conduct before and during the liquidation process. In most cases, you are free to start another company without restriction.
Can Resigning Protect a Director from Personal Liability?
No, resigning does not protect a director from personal liability for their actions while they were in position.
What Happens to Directors’ Loans in Liquidation?
Directors must repay any overdrawn directors’ loans as these are considered company assets and can be used to pay creditors.
Can Liquidation Affect a Director’s Credit Rating?
Typically, the process would not have adverse effects on a director’s personal credit score, although the insolvency event might appear as a note if he or she applies for finance as the director of a future company.
How Long Does a Directorship Ban Last?
A directorship ban can last between 2 to 15 years, depending on the severity of the misconduct.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
