What Happens to a Director in Liquidation?
Company liquidation can be a very worrying time for everyone involved.
Many directors panic they’ll be forced to pick up the company’s debts, or go on to face nasty legal action. While this can happen, it’s easy to avoid when equipped with the proper knowledge.
So what happens to directors in a liquidation? What are the potential consequences? And how can you protect yourself?
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What Happens to a Director During an Investigation?
Control of the company is handed over to a liquidator when the company enters into liquidation.
The liquidator then reviews the company’s affairs to ensure that all assets are present and that the director took the correct measures were taken to protect the position of creditors.
The review covers the past two years’ of the company’s finances. The results of this investigation can affect whether you have to pick up the company’s debts, or whether you can act again as a director in the future.
Can a Director Be Held Responsible for Company Debts?
Thanks to limited liability, company debts usually remain the problem of the company itself; the liabilities are limited from transferring to someone else. This means that in the event of liquidation, directors don’t have to worry about company debts sticking around.
However, there are some exceptions to the rule:
Personal Guarantees
If you’ve signed a personal guarantee on a loan, the debt will be carried over to you. You’ll be personally responsible for repaying any outstanding amounts once the liquidation is completed.
Depending on the size of the loan, this can be a problem. If you can’t afford to repay the debt, you may be forced into personal insolvency.
Overdrawn Director’s Loan Account
Any time a director takes money from the company – beyond their usual salary or dividend payments – it is considered a loan from the company to the director.
When a company is liquidated, one of the ways a liquidator seeks to repay creditors is to call in any debts owed to the business. This includes overdrawn director’s loan accounts. In some cases the amount is just overlooked, but if it’s over £10,000, you’ll probably be expected to repay the loan.
Misfeasance
Being a company director comes with a certain set of legal responsibilities. These are known as fiduciary duties – your financial obligations towards other parties. As a director, you must act in the interest of your shareholders, employees, and creditors.
There are several ways you can violate this duty:
- Making preferential payments
- Selling assets below market value
- Hiding company assets
- Taking an unreasonable salary
All of these actions can result in a civil charge of misfeasance. If found to be liable, you may be made personally liable for company debts. You could also be hit with large court fines or disqualified from future directorship.
Wrongful Trading
When a company enters into insolvency, your fiduciary duties as a director change. You must promote the interests of your creditors first, not those of the business or its shareholders.
However, many directors fail to do this.
When a business enters into insolvency, it’s natural to want to keep trading in an attempt to turn things around. Sadly, this rarely works out. Instead, the business continues on its downward spiral, worsening the position of company creditors.
Continuing to trade while insolvent is known as wrongful trading. This civil charge can result in you being made personally liable for the company’s debts. You may also be dealt hefty fines or disqualified from acting as a director in the future.
Fraudulent Trading
This is a serious criminal charge. It only applies in rare circumstances where a director has deliberately acted with the intent to defraud – for example, taking out loans when you knew you couldn’t repay them.
If found guilty, you can be made liable for company debts, fined by the court, or disqualified from acting again as a director. You can even be sentenced to up to 10 years in prison.
Can You Still Be a Director After a Liquidation?
So long as you’ve not violated your directorial duties, there’s nothing to stop you from acting again as a director in the future.
There are some restrictions to keep in mind, though.
You won’t be able to create or manage another company with the same (or similar) sounding name for the next 5 years. For example, if your old company was called ABC Limited, you couldn’t open a new company called ABCD Limited.
You may be able to reuse the name in some cases, but, generally speaking, it’s a bad idea. You could end up facing court fines or personal liability for company debts.
Yes – directors can resign during the company liquidation process. However, this will not prevent their conduct from being investigated. They’ll be expected to cooperate with the liquidator.
Can Company Directors Claim Redundancy?
Yes – directors can claim redundancy entitlements from the government.
To be eligible, you must have:
- Been registered as an employee of the company
- Worked at least 16 hours a week
- Been an employee for the last 2 years
- Receive a monthly wage
Despite many directors assuming that only employees are able to claim redundancy, company directors can too. This can be a real lifeline if the insolvent company is your main source of income.
How Can I Protect Myself During Liquidation?
Many directors are frightened of the consequences insolvency might bring. Thankfully, these negative outcomes are rare, as long as proper action is taken.
If you think your business is insolvent, you should speak to an insolvency practitioner right away.
Entering into a proper insolvency procedure – such as a Creditors’ Voluntary Liquidation or a Company Voluntary Arrangement – allows you to fulfil your duties to creditors, safeguarding you from any further financial or legal fallout. When early action is taken, a successful business turnaround may even be possible.
Get in touch today to arrange a free consultation.
