What happens to a company director during liquidation?

Understandably, the idea of liquidation can be very stressful for company directors. If you’re liquidating an insolvent business, you may worry that creditors will take legal action against you or that you could become personally liable for the company’s debts and your personally-held assets will be at risk.

However, the liquidation process is actually a positive experience for many directors. Yes, your business will be closed, but the pressure associated with keeping it afloat has often become so great that bringing it to an orderly and efficient end can come as a relief. 

Liquidation also brings an end to the relentless creditor pressure you may have been under, and ordinarily, you will not be liable for any of the business’s debts. Any debts the company cannot pay will be written off, the company will be struck from the official register and you’ll be free to start something new. 

Here we explain everything you need to know about the liquidation process as a company director, so you know what to expect, what the risks are and how to protect yourself. 

Understanding the company liquidation process

Company liquidation is a formal process to close a solvent or insolvent business. A solvent business can pay all its debts within 12 months of the company’s liquidation. An insolvent business cannot pay its debts when they’re due or has liabilities that outweigh its assets. 

There are different liquidation procedures to close solvent and insolvent businesses.

Solvent liquidation

The procedure you use to wind up a solvent company is called a Members’ Voluntary Liquidation (MVL). It allows a company director to close their business voluntarily, usually because they want to retire, start something new or no longer need the business.  

You must appoint a licensed Insolvency Practitioner to manage and administer the liquidation. They will wind up the company’s affairs, pay its creditors, sell its physical assets and distribute the proceeds among the shareholders in a tax-efficient way.

Insolvent liquidation

 If your company cannot pay all its debts, you must close it using an insolvent liquidation. There are two types of insolvent liquidation: Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation. You can enter your company into a CVL voluntarily whereas Compulsory Liquidation is forced on you by a creditor. As such, the risk of legal and financial repercussions is greater with a Compulsory Liquidation.  

If you enter a CVL, an Insolvency Practitioner of your choosing will act as the liquidator. In Compulsory Liquidation, the official receiver (the government’s version of an Insolvency Practitioner) will take on the role. They will sell the company’s assets and use the proceeds to repay its creditors as far as possible. Any debts they cannot repay will be written off and the business will be closed. 

How does the role of a company director change during liquidation?

When a company enters either solvent or insolvent liquidation, the director effectively loses their standing as the head of the company. They are no longer in control of the business or able to make decisions or act on its behalf. They also lose control over its assets. That control passes to the liquidator, who begins the process of winding up the company. 

The directors may be asked to assist the liquidator by providing financial records, details of its assets and creditors, and any other information or documentation as requested. The directors must cooperate with the liquidator, attend meetings and make themselves available for an interview.   

Will my conduct as a director be investigated during liquidation?

If your company enters insolvent liquidation, the liquidator will investigate the reasons for the business’s failure and your role in it. As part of the investigation, they will ask you to complete a questionnaire and you may have to attend an in-person interview. 

During the interview, the liquidator will ask you why you think the company failed and what you did to prevent it. They will also scrutinise company accounts and other documents for evidence of misfeasance or wrongful or fraudulent trading. They will pay close attention to the following areas:

• Payments made by the company and whether certain creditors were favoured ahead of others. 
• The transfer and sale of company assets at less than market value
• Dividend payments and whether the company had sufficient profits to make them
• The presence of an overdrawn director’s loan account and whether it contributed to the company’s decline
• The misuse of Bounce Back Loans or applying for credit using fraudulent means 
• Continuing to trade despite knowing the company was insolvent, thereby increasing creditor arrears 

If the investigator finds evidence of wrongdoing, they will send a report to the Insolvency Service and it will decide what action to take. Possible penalties include fines, being made personally liable for company debts and being disqualified from acting as a director for two to 15 years. In cases of fraudulent trading, you could even receive a prison sentence.     

Are directors personally liable for company debts in liquidation?

In a solvent liquidation, any outstanding debts are paid as part of the liquidation procedure and the remaining funds are distributed among the shareholders. As all the debts are paid, there’s no risk of personal liability issues for the directors. 

It’s not quite so simple in an insolvent liquidation. The limited liability that limited companies benefit from means that, ordinarily, the directors only stand to lose their original investment in the business if it fails. They are legally and financially separate from the company, so its debts cannot pass to them personally. 

However, there are certain circumstances where the ‘veil of incorporation’, as it’s known, can be lifted and the company’s debts can pass to the people who run it. You could be made personally liable for a company’s debts on liquidation if:

You signed a personal guarantee to secure a loan
You have an overdrawn director’s loan account
You are guilty of misconduct or wrongful or fraudulent trading
An element of personal liability was included in the original shareholders’ agreement

 Can I resign as a director when my company is being liquidated?

Although you can resign from a company that’s being liquidated, depending on your circumstances, there may not be much to gain if you do. You are still legally obliged to assist the liquidator in their duties, hand over documents and attend an interview if required. 

The liquidator will also investigate your conduct leading up to and during the insolvency and can issue penalties against you. They may also pursue you if you have an overdrawn director’s loan account and any personal guarantees you have given will still be enforceable.    

Can I run another company after my business has been liquidated?

Regardless of whether you close your company via solvent or insolvent liquidation, there are no restrictions on your ability to run another business. The only potential issue is if the liquidator uncovers an example of misconduct that could lead to a ban. Director disqualifications can last up to 15 years and prevent you from being involved in the promotion, formation or management of a company in any way.  

If you choose to start a new company after liquidation, you can’t use the same or a similar name as the liquidated business for five years without the court’s permission. If you want to use the same name, you must apply to the court within seven business days of the end of the liquidation. 

Need advice?

Are you thinking about liquidating your company and want to know more about the risks and implications? Or perhaps you’d like to discuss your options with an experienced Insolvency Practitioner. Whatever your situation, please get in touch for a free, same-day consultation or arrange a meeting at one of our local offices. We’ll discuss your circumstances and guide you on the best route forward.