For many directors, insolvency is a fearful prospect that carries a lot of uncertainty.

If you are worried about any aspect of your business having reached the point of liquidation, whether this relates to things you did or didn’t do in the lead up to insolvency, or are worried about possible personal liability or whether you can claim statutory redundancy, we can help. We are highly experienced Insolvency Practitioners and Business Advisors.

In this article we’ll explain the likely process of insolvency and the implications for directors both before and after the event.

Insolvent Company Director

Directors Powers Cease

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).

At this point, the insolvency practitioner takes over creditor communications, but will require your support in gathering accounts and other information allowing them needed for their Statement of Affairs document. This document will gives creditors a picture of the situation and estimate potential returns.

Investigation into Directors Conduct

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 the moment you recognised your position you placed the interests of company creditors first and foremost. 

Where they find that you placed your own or other interests before creditors you 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.

Personal Liability?

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. So the simple answer is that having your company become insolvent does not mean, save for certain situations detailed below, that you  face personal liability.

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..

If you are facing insolvency and are aware of having a personal guarantee in place we suggest you contact us at the earliest opportunity to ascertain your options.

You will also be at risk of personal liability if you have an outstanding directors loan owed to the company (see below) and/or you have acted unlawfully, such as continued to trade when you knew or ought to have known the business was insolvent.

Directors Redundancy in Liquidation

Where a director has been employed by a company trading for more than two years, and PAYE has been paid, directors redundancy payments can be claimed by the director available from the Government. You can also claim for holiday pay, unpaid wages and certain other statutory entitlements.

The average directors redundancy payment in the UK is £12,000.

Overdrawn Director’s Loan Account

Once the liquidator (insolvency practitioner) takes control of the company, his responsibility is to maximise the return for creditors. If he discovers money owed from a director, this is classed as a business asset like any other and must be called in. 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.

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.