Can I resign as a director if my company is insolvent?

If your company cannot pay its debts when they become due or the value of its assets is greater than its liabilities, it is technically insolvent. At that point, the stress of managing the business may become too much, and you’d be forgiven for wanting to resign as a company director so you can have a fresh start. 

While there’s nothing legally to prevent you from resigning as the director of an insolvent company, it’s not necessarily a smart move and could leave you in a worse spot. Despite your resignation, you will still have to fulfil certain obligations and may be liable for your actions and decisions while running the company. It can also detrimentally impact your professional reputation and potentially increase the risk of financial and legal repercussions.   

What happens if I resign as a director of an insolvent business?

Resigning from an insolvent company is unlikely to give you a clean break or represent the fix-all solution you want. You still have obligations to meet and liability issues can arise due to your past actions. Here are some of the potential issues to be aware of.

Personal guarantees

Despite your resignation, any personal guarantees you have signed for company borrowing will still be legally binding. If the company fails and cannot repay a debt in full, the guarantee will be called on and you will become personally liable. It is difficult to get out of a personal guarantee, although you can ask the remaining directors or shareholders to take on the guarantee as a condition when you resign and sell your shares.

Overdrawn director loan accounts

If you borrow money from the business you have not repaid, you create an overdrawn director’s loan account. It’s common for the remaining directors to write off this liability when you resign. However, if the business subsequently enters an insolvency process, the Insolvency Practitioner can act to recover the amount for the benefit of the company’s creditors. 

Legal duties

Company directors have a legal duty to operate the business with due diligence and to protect the interests of the company’s creditors when it becomes insolvent. When you enter an insolvency procedure such as Administration or Liquidation, your actions will be investigated even if you have resigned, which could give rise to claims against you personally. 

As part of their investigation, the administrator or liquidator will look for examples of the following:

• Failing to keep accurate records
• Not exercising reasonable care and skill in your duties
• Continuing to trade when you knew or should have known the company was insolvent and worsening your creditors’ positions
• Selling assets at less than their true worth to the detriment of your creditors
• Paying certain creditors ahead of others
• Paying dividends when the company did not have the profits to do so
• Fraud or misrepresentation when obtaining credit

If you have been involved in any of the above, you could receive a fine, be made personally liable for company debts, be disqualified as a director or even receive a prison sentence. 

Will I be investigated if I resign as a director of an insolvent company?

When an insolvent company enters Administration or Liquidation, anyone who has held a directorship in the previous three years can expect to be questioned by the appointed Insolvency Practitioner, regardless of whether they have resigned. If the company is forced into liquidation by a creditor, it will enter Compulsory Liquidation and the official receiver will conduct the investigation. 

During the investigation, you will be asked to complete a questionnaire and potentially attend an in-person interview. It is your legal duty to comply with the investigator’s requests, attend the interview and hand over information as required. Resigning in an attempt to avoid these duties can increase the risk of repercussions. 

If you resign as the director of an insolvent company, you also risk losing control over the information that’s given to the Insolvency Practitioner. It is not unusual for director disputes to contribute to the insolvency of a company. By resigning, you allow your fellow directors to give their side of the story to the Insolvency Practitioner first, control the flow of information and create a narrative that could reflect badly on you. 

How do I resign as a director of an insolvent company?

If you decide to resign as a director of an insolvent company, there are a few steps you should take. 

• Contact a licensed Insolvency Practitioner to get a clear assessment of your business’s financial position and to understand your obligations, the risks you face and what’s expected of you.
• Inform your fellow directors and check your employment contract for details of your notice period before formally putting your resignation in writing. 
• If you are also a shareholder in the business, make sure you are aware of the rules on transferring shares and any restrictions or procedures that apply.
• Notify other relevant stakeholders such as company creditors, clients and suppliers. You must also inform Companies House. 
• You must cooperate with the Insolvency Practitioner if the company enters an insolvency procedure and comply with their requests promptly. You may be asked to provide financial records and details of assets, explain the company’s affairs or attend formal interviews. 

Can I start a new business after resigning?

There’s nothing to prevent you from starting a new company once you have resigned from an insolvent business. The only exception is if you receive a director disqualification for your actions or inactions when running the original company. 

There are also rules around business names. If the insolvent company goes on to be liquidated, you cannot start a new business with the same or a similar name for five years without the court’s permission. If the old company was liquidated with unpaid tax debts, HMRC may also request that you pay a security deposit to protect it from future losses. You may also find it difficult to obtain credit from suppliers or a bank loan without providing a personal guarantee.   

How can we help? 

Resigning as the director of an insolvent company can have serious consequences and is not something you should leave to chance. Our licensed Insolvency Practitioners can help you understand the risks, implications and legal obligations, and work to protect your interests. Get in touch for a free, same-day consultation or arrange a meeting at your local office.