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Director Duties and Liquidation

While a company’s liquidation can feel like an admission of defeat for its director, it can be the best way forward if a company is in financial difficulty that it cannot survive. 

While working as a company director, you should always act in the company’s best interests, and that includes being aware of that company’s insolvent position and how you act in the aftermath.  

So, what should a director do before, during, and after their company’s liquidation? 

Prior to Liquidation 

If you become aware that the company is insolvent, you should act immediately. This minimises creditor losses and proves that you’ve acted in the company’s best interests. 

The best way to alleviate this kind of issue is to speak to a licensed and regulated insolvency practitioner, who will assess your company’s situation and help you decide the best route forward. 

Acting quickly also reduces the risk of the company trading whilst insolvent. This occurs if the company continues trading as if nothing is wrong while the directors know the company is insolvent. Taking money from customers in full knowledge that the company cannot complete the work as promised can lead to accusations of wrongful trading, leading to additional trouble during and after the insolvency. 

Directors can reduce the risk of these problems by putting the company into a Creditors Voluntary Liquidation (CVL).  

If the directors act quickly enough, it might be possible to rescue the insolvent company without liquidating it. This could involve repaying an affordable portion of the company’s debts through a formal repayment arrangement or restructuring the company through administration.  

If the company’s debts are at a burdensome level, and its future is threatened, creditor pressure is overwhelming, or you don’t want to continue running the company, then voluntary liquidation might be the best option. 

During Liquidation 

If the directors and insolvency practitioner conclude that liquidation would be the best course of action, they will take the first steps towards setting the process in motion. The CVL ends all creditor pressure, writing off the company’s debts, and once the process concludes, the company ceases to exist. 

During the CVL, the insolvency practitioner takes control of the insolvent company and its assets. The realised funds are distributed pro-rata to the company’s creditors after taking their fees.  

If there are funds to be distributed amongst creditors, this will be done according to the repayment hierarchy: 

  • Secured creditors with fixed charges. (Banks, lenders, machinery, premises). 

  • Preferential creditors. (Employees and certain HMRC Debts). 

  • Secured creditors with floating charges. (Works in progress, stock, unfactored debts). 

  • Unsecured creditors. (Suppliers, contractors, customers).  

  • Shareholders. 

What about an unpaid Bounce Back Loan? 

If your company took out a Bounce Back Loan during the COVID-19 pandemic, it is treated as an unsecured debt. Bounce Back Loans had 100% government backing and had no personal guarantees.  

That said, you could be held personally liable for your company’s Bounce Back Loan if you misused its funds

During the liquidation, the director will investigate the director’s conduct leading up to and during the insolvent period. This shouldn’t be an issue if you’ve acted in the company’s best interests during this time. 

After Liquidation 

Once the liquidation concludes, in most circumstances, the directors can move on, potentially starting a new limited company should they wish to.  

If you discuss your circumstances with your insolvency practitioner, you might qualify for a pre-pack arrangement. This involves the insolvent company’s assets being sold at market value, and purchased by a newly formed company, allowing the business to continue. 

There are strict restrictions around the reuse of the old company’s name and other brand-related assets, which you should discuss with your insolvency practitioner prior to committing to this process. 

Whether, as director, you face any longer-term consequences from liquidation depends on your conduct while in the role. If you’ve committed misconduct while acting as director, such as continuing to trade whilst the company was insolvent, you could be found guilty of wrongful trading.  

Similarly, if there is an outstanding director’s loan account, this could leave them personally liable for the company’s outstanding debts. 

Personal guarantees should also be considered at this stage. If, as director, you’ve signed one or more personal guarantees to secure funding for the company and the debts to which the guarantees relate are not repaid, you are liable for those debts. 

To Summarise 

If you become aware that your company is insolvent, you should act immediately. Speak to a licensed insolvency practitioner to discuss a way forward. Depending on the company’s circumstances, this may involve liquidating the insolvent company and drawing a line under its debts. During liquidation, the insolvency practitioner will investigate the company’s actions prior to and during the insolvent period to ensure you have acted in the company’s best interests. If you have, you can move on after the liquidation if you don’t have unpaid personal guarantees. If you do have personal guarantees, have traded whilst insolvent, or have misused a Bounce Back Loan’s funds, you could be held liable for the company’s debts. 


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