COMPANY LIQUIDATION: DIRECTORS’ RESPONSIBILITIES & LIABILITIES
As director of a limited company, it is vital that you know exactly where you stand. This includes what protection you have should the financial situation of the business worsen. Discover more about directors responsibilities and liabilities during liquidation.
What Happens to the Director of a Company in Liquidation?
Exactly what happens to the director of a company in liquidation will depend on their unique situation, how they conducted themselves, what method of liquidation was undertaken, how promptly they acted, and whether they ever signed some form of personal guarantee. .
Possible outcomes for a director of a company in liquidation include:
Loss of Power
Regardless of the circumstances surrounding your liquidation, the most obvious thing that happens to the director of a company in liquidation is that your time as company director will be brought to a premature end, if only temporarily. The director is summarily stripped of their position once an insolvency practitioner is appointed.
While the insolvency practitioner will, in essence, be acting as the company director for a period, they will still require the assistance and cooperation of the former director. This will be to gather any and all information, data, accounts etc.
Conduct Investigated
As director of the business in liquidation, the buck stops with you. Therefore, it is standard practice for an insolvency practitioner to investigate the conduct, actions, and behaviour of all directors, in the period prior to liquidation.
The investigation will be centred on seeking evidence that you, as director, did not place your own interests ahead of those of the company and its creditors. Punishments for this can include:
- Disqualification as director of any company for up to 15 years
- Wrongful trading charges
- Fraudulent trading charges
- Fines
- Jail time
Personal Liability
If you have signed any form of personal guarantees, are seen to be guilty of misfeasance or wrongful/fraudulent trading, or it is stated in a shareholder agreement, it may be possible for the assets of the director to be used to pay back any debt or as collateral.
The way the structure of business is set out is to provide as much protection as possible for company directors. This is done to ensure that a failed business does not necessarily lead to the personal lives and personal finances of all involved in the operation being ruined.
Additionally, when the company liquidator takes over the business, should he discover money owed by a director, for example through overdrawn director’s loan accounts, this should be classified as a business asset and therefore must be called in.
Company Liquidation Directors Responsibilities
Should a company become insolvent, the responsibilities of its director must immediately shift from serving the best interests of shareholders and the business at large, to addressing the debts and repaying any creditors.
Any failure to act towards these new responsibilities could result in the director being accused of wrongful or unlawful trading down the line. The result of such an accusation can be disqualification or even personal liability.
Making sure that you act accordingly, cease trading immediately, and safeguard company assets for any creditors, is the most effective strategy possible to minimise the risks of personal liability.
Liabilities of Directors During Liquidation
Potential liabilities of directors during liquidation can vary from losing their position as director right up to time in prison should the situation be bad enough. Possible liabilities can include:
- Termination of Contract: Breaching fiduciary duties can result in a directors contract being terminated without notice.
- Disqualification: Courts can disqualify incompetent or negligent directors from holding the position for up to 15 years.
- Repay lost funds: Offences like misfeasance, fraudulent/wrongful trading, or overdrawn directors loan accounts could lead to needing to pay back any misappropriated funds.
- Buyout: In cases of unfair prejudice, courts could force a director to buyout the claimants shares.
Download our FREE Guide to Liquidation
While a partnership voluntary arrangement does offer a lifeline for struggling partnerships, it’s by no means guaranteed to succeed in every case. If the partnership is unable to meet the terms of repayment, or it becomes clear that recovery is no longer viable, the next steps may be to consider closure, including liquidation options.
Liquidation involves winding down the business and distributing assets to satisfy creditors. It’s a complex process, with various legal and financial implications — understanding this is key. For a comprehensive guide on what liquidation entails, download our dedicated Liquidation guide to learn more.
How to Reduce Directors’ Liabilities During Liquidation
There are a series of measures you can undertake to reduce directors’ liabilities during the liquidation process. From acting honestly to minimise losses at all stages and being proactive, to tackling the issue head on and contacting an expert who may be able to assist.
How Inquesta Helps with Director Liquidation Liabilities
Being the director of a limited company is a difficult and highly stressful role. With so many things to consider and people to look out for, it can be easy to not look out for yourself and consider your future.
Protecting yourself, ensuring that you and your finances are safe from any eventuality in the event of your company’s fortune beginning to stall should be one of your top priorities.
Inquesta’s team of insolvency experts possess decades of experience and have assisted directors in a huge variety of industries.
We understand how difficult being a director can be. With so much complication, it’s important to have the best people looking out for you, to ensure your best interests are considered. Our team can assess any situation and minimise your risk of personal exposure.
Get In Touch
Our Specialist Team
As specialist liquidators and licensed insolvency practitioners, Inquesta’s expert team are perfectly placed to assist — no matter your circumstances.
Steven Wiseglass
Director of Insolvency
A co-founder of Inquesta, Steven is a licensed Insolvency Practitioner with over a decade of experience in the field. He is a member of the Insolvency Practitioners Association, Association of Business Recovery Professionals (R3), and his insolvency licence is issued by the Insolvency Practitioners Association. In addition, he sits on the R3 committee of the North West Regional Committee.
Steven specialises in advising directors of small to medium-sized businesses, and has a wealth of expertise in providing the most appropriate advice whatever the firm’s circumstances may be. He has also been instrumental in helping company directors save their business and rebuild them into successful enterprises.
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