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?

Liquidation means a director’s role comes to an end. During this process, the director’s responsibility is to cooperate with the Official Receiver or appointed liquidator, provide necessary company information, and ensure compliance with legal obligations, with the ultimate aim of fulfilling creditors’ claims and legally discharging the company’s liabilities.

  1. Directors may be subject to legal actions or disqualification, particularly if their actions are found detrimental to creditors or shareholders.
  2. Directors have a duty to cooperate with the liquidator and provide accurate financial records and information.
  3. If wrongful trading or misconduct is identified, directors could be personally liable to contribute to the company’s assets.

We’ll cover these implications in more detail below

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Does a Director Lose Control Over Their Company in Liquidation?

When a company enters liquidation, the director indeed loses control over the company. This control is transferred to the appointed liquidator, who is responsible for managing the liquidation process, including the sale of assets and payment to creditors.

The director is required to assist the liquidator but will not make decisions regarding the company’s operations or financial matters during this period.

What Are a Director’s Duties During Company Liquidation?

During company liquidation, a director’s responsibilities include providing the liquidator with all necessary company records, financial statements, and information about the company’s assets and liabilities.

Directors must also cooperate with the liquidator by answering questions and providing explanations regarding the company’s financial dealings and decisions leading up to the liquidation.

You are expected to act honestly and in the best interest of creditors, ensuring that all legal and procedural requirements are met throughout the liquidation process.

Will a Director Be Investigated if Their Company Goes into 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.

The scope of the investigation can vary depending on the circumstances of the liquidation. The investigation will be more thorough if there are concerns about fraudulent behaviour, misconduct, or gross negligence.

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.

What Happens in a Director’s Liquidation Investigation?

In a director’s liquidation investigation, a thorough review is conducted to examine the director’s actions and decisions prior to the company’s liquidation. The focus is on identifying any conduct that may have adversely affected the returns to creditors. Key areas scrutinised during these investigations include:

  • Wrongful Trading: This aspect of the investigation looks into whether directors continued the company’s operations when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation. Continuing to trade under these circumstances can worsen the financial position of the company, reducing the potential returns to creditors.
  • Fraudulent Trading: If there is evidence to suggest that business was conducted with the intent to defraud creditors or for any other fraudulent purpose, this will be a significant focus. Fraudulent trading carries severe penalties, including the possibility of criminal charges against the directors involved.
  • Antecedent Transactions: These include transactions at undervalue and preferential transactions. Transactions at undervalue occur when the company makes a gift or sells assets for significantly less than their worth, while preferential transactions happen when the company pays one creditor to the detriment of others. Both types of transactions can unfairly diminish the pool of assets available to creditors, and the liquidator will seek to reverse these transactions where possible.
  • Duty of Care and Record Keeping: The investigation also examines if directors breached their duty of care by making decisions that were unduly risky or not in the best interests of the company and its creditors. Adequate and accurate record-keeping is investigated to ensure that the financial situation was properly documented and reflective of the company’s true financial status.

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

>>Read our full article on the directors conduct report

Is a Director Liable for Their Company’s Debts in 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 they’ve signed personal guarantees, are found to have continued trading during insolvency without minimizing loss to creditors (wrongful trading), or 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.

» MORE Read our full article on Directors Personal Liability

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 fulfill these debts. When a company is liquidated and cannot pay its debts, creditors may seek repayment from the director personally if the director has signed personal guarantees.

Bankruptcy occurs when a director is unable to meet these personal financial obligations arising from the guarantees. It is a legal status where a director’s assets are taken control of by a trustee and sold to pay off debts. This can have serious implications for a director’s financial situation, including loss of assets, impact on credit rating, and restrictions on financial and business activities.

Can a Director Run a Business Again After Liquidation?

Yes, a director can run a business again after the liquidation of a previous company. There is no automatic disqualification for directors simply because a company has gone into liquidation. However, certain conditions and restrictions may apply, especially if the director’s actions contributed to the company’s failure or if they were found guilty of wrongful or fraudulent trading.

Starting a New Company After Liquidation: Is It Possible for a Director?

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

  • Re-use of Company Name: There are restrictions under the Insolvency Act on using the same or a similar name to the liquidated company. This is known as ‘phoenixing’, and specific rules must be followed to legally operate under a similar name.
  • Director Disqualification: If a director has been disqualified as a result of their conduct in the lead-up to the liquidation, they cannot act as a director or be involved in the formation, management, or promotion of a company during the disqualification period.

Are There Restrictions on a Director After Their Company’s Liquidation?

After a company’s liquidation, directors may face restrictions such as disqualification from acting as a director for up to 15 years if found guilty of misconduct, and personal liability for the company’s debts if their actions contributed to the company’s insolvency. There could also be credit implications if they have been made bankrupt due to personal guarantees.

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.

Additionally, they may face legal challenges for negligence, breach of contract, or other civil wrongs.

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.

How to Protect yourself as a Director during Insolvency

There are a number of things that directors can do to protect themselves from the risk of being sued after liquidation, including:

  • Seek legal advice: Directors should seek legal advice from a qualified solicitor to understand their duties and obligations and to assess their potential personal risks.
  • Gather evidence: Directors should keep comprehensive records of all their decisions and actions, as this can help to defend them against any allegations of misconduct.
  • Act ethically: Directors should act in a responsible and ethical manner at all times, both before and during liquidation. This includes avoiding conflicts of interest and acting in the best interests of the company’s creditors.

Get the Support You Need Today

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.