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

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

What Happens to Directors of an Insolvent Company?

Directors Powers Cease once the Insolvency Practitioner has been Appointed

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 Directorial 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 help 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, for example, that you are going to lose your house.

The additional of a personal guarantee makes things a lot more complicated since these are specifically designed to breach the corporate veil. Where a director has personally guaranteed a business loan this does unfortunately mean that the holder of the guarantee has the right to use the asset as collateral.

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.

Directors Redundancy in Liquidation

Where directors have been employed by a company trading for more than two years, and PAYE has been paid, directors redundancy is offered by 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.