What Happens to Directors of a Company in Liquidation?

As a company director, it is important to realise that liquidation can have significant consequences.

The appointed liquidator will be required to investigate a directors actions preceding the liquidation as part of their statutory duties.

For this reason, directors should seek professional advice as early as possible.

In this article, we’ll cover what will be expected of you, plus the risks and potential consequences.

What does Liquidation Mean for a Director?

Here is a step-by-step breakdown of a director’s duties during the liquidation process:

1. Directors Appoint a liquidator: The directors must appoint a liquidator to oversee the liquidation process. The liquidator is responsible for collecting the company’s assets, paying its debts, and distributing any remaining assets to shareholders or creditors. Once the liquidator is appointed, the director’s powers cease.
2. Cooperate with the liquidator: Directors will be asked to provide any information or documents that may be necessary for the Statement of Affairs document, summarising the company’s financial situation for creditors. Directors must also provide access to company records, emails, and assets and to broadly cooperate with the liquidator.
3. Attend meetings: At least one nominated director has to attend and chair the creditors meeting. in which creditors may ask questions as to why the company became insolvent.
4. Directors Duties End – Whether you’re forced into liquidation by a creditor, or opt for a voluntary insolvency procedure, the appointment of the insolvency practitioner means the end of your tenure as company director. The company will cease trading (unless you go into a trading administration, for example). As director, you can no longer act for or on behalf of the limited company.

Directors Investigations During Liquidation

Insolvency practitioners have a responsibility, as part of their duties, to investigate the behaviour of directors in the period preceding liquidation. They will be looking for evidence that directors placed the interests of company creditors first and foremost. 

Where they find that directors placed their own or other interests before creditors, directors could face charges of wrongful or fraudulent trading. These can result in fines, penalties, jail time in the most serious cases, and being held personally liable for corporate debts. You could also face disqualification as a director for up to 15 years.

They will be looking for evidence of the following:

1. Mismanagement: If the liquidator or other parties believe that the company’s directors mismanaged the company’s affairs, they may investigate whether the directors acted negligently or improperly.
2. Fraud or wrongdoing: If there are suspicions of fraud or other wrongdoing on the part of the directors, an investigation may be launched to determine whether the directors engaged in any illegal activities.
3. Insolvent trading: If the company was trading while insolvent (that is, unable to pay its debts as they fell due), the directors may be investigated to determine whether they allowed the company to continue trading while insolvent, in violation of their legal duties.

The outcome of the investigation will depend on the case’s specific circumstances and may result in the directors being found to have breached their duties or engaged in wrongdoing. In some cases, the directors may be sued or face criminal charges due to the investigation.

Are there Risks of Personal Liability for Directors in Liquidation?

The limited company structure is intended to place a clear legal division between personal and corporate finances. Limited Liability is there as a protective mechanism precisely so that directors personal lives are not ruined by a failed company.

But there are some cases

Personal Guarantees – If you have given a personal guarantee this makes things a lot more complicated since, where a director has personally guaranteed a business loan  and the business cannot repay the loan, the lender will enforce the personal guarantee..

Overdrawn Directors Loans – You will also be at risk of personal liability if you have an outstanding directors loan owed to the company. IP’s classed this as a business asset like any other and will call it in alongside the other corporate debts. In the most serious cases, IP’s are forced into taking legal action against the directors, possibly forcing them into bankruptcy, to get the debt paid.

Wrongful or Fraudulent Trading – Wrongful or fraudulent trading refers to situations in which the directors of a company continued to trade despite knowing or suspecting that the company was insolvent.

Fraudulent trading refers to situations in which the directors of a company engaged in dishonest or fraudulent conduct. This could include making false or misleading statements to creditors or shareholders, hiding or disguising the company’s financial difficulties.

If it can be shown that the directors of a company engaged in wrongful or fraudulent trading, they may be held liable for some or all of the corporate debt and for damages.

In some cases, the directors may also face criminal charges, or directorial disqualification for up to 15 years.

Can You be the Director of another Limited Company after Liquidation?

Assuming you have not been found guilty of any wrongdoing and received a disqualification order, there is nothing to prevent you being the director of another limited company. 

Under UK law, an individual who was a director of a company that has gone into liquidation may be disqualified from being a director of another company if it can be shown that they breached their duties as a director or engaged in wrongful or fraudulent conduct. Disqualification can be imposed by a court or by the Secretary of State and can last for a set period (usually between two and 15 years).

If you do start another company, there are strict regulations to prevent ‘phoenixing’ which is to start a company with the same name.

Can a Director Resign from a Company in Liquidation?

Yes, a company director in liquidation can resign from their position although your requirements to cooperate with the insolvency practitioner will persist.

If a company director in liquidation wishes to resign, they should inform the liquidator and follow any resigning procedures set out in the company’s articles of association. 

Summary

• Directors should seek professional advice immediately if the feel a company is insolvent
• Directors powers end in insolvency, but a there is a remaining duty to cooperate with the liquidator
• Personal liability is only a risk in cases of overdrawn directors loans, personal guarantees or misfeasance
• Directors are free to start another company, or assume another directorship, assuming no disqualification order prevents this.