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Understanding director duties in insolvency

Under normal circumstances directors have a duty to act in the best interests of their company, but this changes if the business becomes insolvent. Directors must then prioritise the interests of creditors, and make sure that the company’s debts don’t increase.

Initially, you need to obtain assistance from a licensed insolvency practitioner (IP) when you enter insolvency, and determine the options open to you. Sometimes the only course of action is to enter liquidation, so it’s important to understand the possible ramifications for yourself and other directors.

The importance of entering insolvent liquidation voluntarily

Insolvent liquidation involves selling company assets for the benefit of creditors, and it’s advisable to voluntarily enter a process called Creditors’ Voluntary Liquidation (CVL). Although it means your company will close down permanently, voluntarily entering into liquidation protects creditors from further losses.

Avoiding wrongful or illegal trading is a key consideration, and both become a risk if you carry on trading regardless of the company’s financial position. The ramifications for yourself and other directors are serious, with the potential for disqualification for up to 15 years. Personal liability for company debts is also a possibility, and in cases where deliberate attempts have been made to defraud creditors, a prison sentence could be handed down.

Don’t wait for a creditor to take action against the company

A formal insolvency process such as Creditors’ Voluntary Liquidation must be administered by a licensed insolvency practitioner (IP), and so attracts professional fees. This is why some directors wait for a creditor to take them to court, as they believe they can’t afford a CVL.

The problem with entering compulsory liquidation, however, is the stringent investigation that’s carried out by the Official Receiver (OR) or appointed liquidator. By waiting for a creditor to wind up the company, you’re effectively allowing more debt to accumulate and worsening the position of creditors.

If any misconduct or breach of director duties is subsequently uncovered, you face the serious sanctions and penalties mentioned above, including personal liability and disqualification.

Director redundancy and insolvent liquidation

The average claim for director redundancy is currently £9,000 - this could pay for the CVL procedure and help reduce your chances of misconduct allegations when the liquidator’s investigation is complete.

But how do you know if you’re eligible to claim redundancy pay as a director? Essentially, you need to have worked for the company as an employee as well as holding office as director.

These are some of the conditions for claiming director redundancy:

  • Working for your limited company under a contract of employment - written, oral, or implied – for at least two years
  • Working for a minimum of 16 hours per week in a role that’s not just advisory
  • Taking a regular salary under PAYE

You must also be owed money by your company - this could be the initial investment you made when the company was formed, for example. Directors are commonly perceived as being ineligible for statutory redundancy pay, but this is definitely not the case.

Further professional guidance on insolvent liquidation and director redundancy

A redundancy payout could cover the professional fees involved with a CVL, but may also repay some of the company’s debt. We can help you establish your eligibility for director redundancy, and will offer more tailored advice on insolvent liquidation.

UK Liquidators are specialists in this area – please contact one of our partner-led team to arrange a free same-day consultation in complete confidence. We operate an extensive network of offices around the UK.

Jonathan Munnery
Partner

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Did you know?
Are you eligible to claim Director Redundancy?
As a Limited Company Director you may be entitled to claim Director Redundancy - Average UK claim is £9,000*.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.

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