What Happens to Directors of a Company in Liquidation?

What does liquidation mean for you as a director?

It’s essential that, if you’ve either been threatened with company liquidation by a creditor, or are choosing the solution voluntarily, you know exactly what lies ahead.

We’ll explain what you should expect in terms of process, paperwork and consequences so you can get through the process as painlessly as possible.

What Does Liquidation Mean for a Director?

If you’re a director and your company enters liquidation, your duties come to an end.

You will lose your power to make decisions and instead will play a supportive role to either the Official Receiver or the Insolvency practitioner handling the case.

You should expect your own behaviour to be investigated as part of the liquidation procedure, as part of the IP’s due diligence process.

Once the company is closed, your directorship will end too.

What Happens to a Director During the Liquidation of a Company?

Directors should expect the following steps and consequences during liquidation of their company:

1. Official Receiver (OR) Takes Over – In compulsory liquidation, an official receiver will be appointed to liquidate the company. They may decide to hand over the role to an insolvency practitioner at a certain point.
2. Directors no longer have control over the company
3. Directors hand over the company’s assets, records and paperwork to OR or Insolvency Practitioner
4. Investigation into Directors Conduct – If acts of wrongful trading or director misconduct are identified, company directors could be made personally liable for company debts or be banned from acting as directors for up to 15 years. If serious fraud is uncovered, the directors could face a custodial sentence of up to seven years. However, in reality, this is quite rare, and in most cases, you will be free to set up another company and to begin trading once the liquidation is complete. 
5. Helping Insolvency Practitioner with Relevant Information – In general, directors powers cease at the point of the insolvency practitioners appointment, and the director’s chief responsibility thereafter will be providing the IP any relevant information.
6. When the company is closed directors are free to start again or seek employment

What are a Director’s Duties During Liquidation?

As well as acting in the best interests of the company creditors during the period of insolvency, directors are legally obliged to cooperate with the official receiver or insolvency practitioner during the liquidation process. If you fail to comply with the official receiver’s requests then allegations of misconduct could be made that may result in an Insolvency Service investigation and penalties may apply.  

Once an official receiver has been appointed to liquidate the company, they will send the directors a questionnaire to gather information about its assets and creditors. The directors will also be required to attend an interview where the reasons for the company’s insolvency and eventual liquidation will be discussed. At the interview, the official receiver will ask for:

• The completed questionnaire
• Company accounts, records and paperwork
• Full details of the company’s assets and liabilities
• Details of whether other parties are holding assets or trading records

You must answer the official receiver’s questions to the best of your ability. If you refuse to complete the questionnaire or attend the interview, the official receiver can forcibly seize records and request the court to compel you to do so. 

The official receiver may also request assistance from the directors in selling the company’s assets. If there is an overdrawn director’s loan account then that will have to be repaid and personal guarantees may be enforced if the company cannot afford to satisfy its debts.

Investigation into Directors Conduct During Company Liquidation

The chief things an Insolvency practitioner or Official Receiver would be looking for are:

• wrongful trading – continuing to trade despite knowing the company was insolvent
• fraudulent behaviour – fraud or misfeasance
• transaction at undervalue – selling assets at an unfairly cheap price
• unfair preference – paying one creditor over another

Can I be the Director of a Company After Liquidation? 

Generally speaking, yes. As long as you don’t receive a disqualification from acting as a company director for your role in its insolvency or conduct during the liquidation, then you are free to set up another company or continue running another business that’s already in existence.

However, there is an important rule that you should be aware of. If you have been the director of a liquidated company, Section 216 of the Insolvency Act 1986 prevents you from setting up another company with the same or a similar name. The rules apply to any person who has acted as a company director or shadow director at any point in the 12 months before the business went into liquidation. They cannot use the same or a similar name as the liquidated company for a period of five years. 

This rule is in place to reduce confusion for creditors of the liquidated company and prevent bad feelings between the creditors and the new company. It’s understandable that creditors who had all or a proportion of the debt they were owed by the old company written off would not be pleased to see the appearance of a new company with the same or a similar name. If you do choose to use the same or a similar name for a new company, criminal action could be taken against you and you could be liable for all of the debts of the new company if it enters liquidation.  

There’s also one other factor to consider when setting up a new company following liquidation. If HMRC was a major creditor of the liquidated company and it did not receive all of the money it was owed, it may insist on a VAT or PAYE deposit being paid, known as a security bond, to protect its position. That will involve a potentially large payment that you’ll have to make upfront when registering the new company with HMRC. 

Does Liquidation Affect a Director’s Credit Rating?

As a company director, it’s understandable that you’ll be concerned about the potential impact of liquidation on your personal credit score. The good news is that a limited company is a separate legal and financial entity from the people who own and run it, so their credit records are entirely separate. Therefore, none of the debts or legal judgments made against the liquidated company will appear on a director’s or shareholder’s personal credit file. 

However, there are a few instances when the liquidation of a company may impact your personal credit rating:

• You signed a personal guarantee – If you have signed a personal guarantee for a debt that is not repaid in full by the company on liquidation, you will become personally liable to repay the debt as outlined in the terms of the guarantee. The lender will be able to pursue you personally for the debt and any action they take will be placed on your personal credit file, which will impact your ability to access credit in the future.     

• You have an overdrawn director’s loan account – If you have an overdrawn director’s loan account then the official receiver can demand repayment of the debt for the benefit of the company’s creditors. They have the power to take legal action against you to enforce the repayment of the debt, which will leave a mark on your personal credit file. 

• You’re made personally liable for company debts – If the official receiver finds that you did not meet your fiduciary duties to the company’s creditors in the period leading up to and during insolvency, you could be made personally liable for a proportion of the company’s debts. Action can be taken against you personally to enforce the payment, which will leave a mark on your credit file.  

Expert Advice for Directors

If you and your company have been threatened with compulsory liquidation, you should seek professional assistance immediately. Give us a call on 08000 24 24 51 or email info@businessexpert.co.uk for a free and confidential initial consultation to discuss the best way forward for your business.