What happens to a director of a company in liquidation?

When a company reaches the point that it is unable to repay its debts, it will often enter into liquidation. While this is a challenging time for any business, it can be particularly stressful for the company’s directors, who are unsure what liquidation will mean for them personally. The process can seem daunting, but once you understand how it works and what it means for directors, it becomes easier to manage. 

In this article, we take a closer look at what happens to a company director during liquidation. 

Immediate change in the director’s role

Once the company formally enters liquidation, the director’s control and power within the business come to an end. This means that the director can no longer make decisions about assets or liabilities – instead, a licensed Insolvency Practitioner takes over as the liquidator and person in control of the company.

At this point, the licensed Insolvency Practitioner will be responsible for selling any remaining assets, handling creditors’ claims and overseeing the final closure of the company. This shift can be a big change for directors, especially if they’ve built the company from scratch. But this ensures that the liquidation process is handled fairly.

One cause of confusion can be what happens between the point in which the directors have given an instruction to a nominated liquidator, but the company has not yet formally entered liquidation.  In this case, the position is that the Director is still fully responsible for all director duties and the insolvency practitioners role is to support the director with financial control and advice until the liquidation is confirmed.  This means that assets can be sold prior to liquidation and this is the most common outcome, to allow connected parties to buy back their assets at a fair market value, which is then deposited with the insolvency practitioner to allow these to be used to pay the liquidation fees and costs once creditor approval is received.

Directors must cooperate with the liquidator

Although a director will no longer be in control of the business, they are still responsible for working with the liquidator and ensuring they have everything they need to oversee the process. This may include: 

• Company accounts and financial records
• Completion of a director’s questionnaire to assist the liquidator with their investigations into the conduct of the directors
• Explanations of decisions made before liquidation, particularly where further payments have been made to creditors, in order to evidence that they were essential or in the ordinary course of business (and not preferences)
• Access to company systems, software and/or the former trading premises

If a director fails to comply with the liquidators or provide the necessary information, they may face legal action as legal powers are granted to liquidators to force the disclosure of info or to provide info at court. 

Clear lines of communication and cooperation are essential for a smooth and successful liquidation. 

Review of directors’ conduct

As part of the liquidation process, the directors’ conduct will be reviewed to look at their behaviour in the period leading up to the company’s collapse. This is to identify serious issues, such as:

• Wrongful trading
• Fraudulent trading
• Reckless decision-making
• Failure to keep proper financial records
• Paying one creditor ahead of others unfairly

If the review finds you have acted reasonably and did your best to protect the business, then there will be no further action. However, if you are found to have acted irresponsibly or illegally, then the case may be passed to the Insolvency Service for further investigation. The outcome can often result in serious consequences, such as: 

• A director’s disqualification lasting up to 15 years
• Personal liability for company debts in cases of wrongful or fraudulent trading
• Fines or, in rare cases, criminal charges

Keeping accurate records, following the correct procedures and acting legally and fairly can help ensure you do everything in your power to protect your business and ability to act as a director in the future. 

What happens if a director owes their business money?

Directors who have taken out more funds from their business than they have put in are debtors to their business.  This means that their director’s loan account is overdrawn and that they will be asked to repay their loans to the company in Liquidation.

The directors’ ability to pay will be reviewed, following the completion of an income and expenditure form, and if the director has disposable income available to make monthly repayments, they will be asked to make a monthly repayment offer, alternatively a lump sum offer can be made.  Typically, if the director has sufficient equity in their home to pay their loan back in full then very little discount can be accepted in full and final settlement but some discount may be allowable given that costs are incurred to force sales of homes, along with returns being less if directors have other creditors.

Can directors of a liquidated company start another company?

Yes, if you haven’t been disqualified, you can become a director of a new company straight away, or you can continue with existing other directorships. There are rules around using the same or a similar trading name, but this can be done legally if you follow the correct steps with the liquidator and notify creditors properly. For many directors, liquidation becomes a turning point.

Looking for liquidation advice?

For tailored, trustworthy liquidation advice, contact Bridge Newland. One of our experienced team members will be happy to talk through your options and next steps.

Categorised in: Uncategorized