Many directors choose to liquidate their companies at some point. This could be for various reasons; some directors liquidate their companies once they retire, while others do so to move on to other ventures. Others still do so once their companies become unprofitable, as a means to retain as much profit as possible once the enterprise has peaked financially, but has outlived its purpose. This is to say, the liquidation of companies is a widespread practice.
Despite the commonality of the practice, first-time company directors may be hesitant to liquidate their companies, lacking the same knowledge of the consequences possessed by seasoned directors. For example, some directors are unsure whether they can still be directors after liquidating a company.
In this article, Clarke Bell will discuss the consequences of liquidating a company for directors, including whether you can still be a director after liquidating a company, details surrounding investigation, and information you need to know if your company is insolvent.
Implications of liquidation for company directors
If you intend to liquidate your company, you should first be aware of the possible implications for you as a director. The first and most notable of which is loss of control; when you place your company into liquidation, you are essentially abdicating your control over the company. This control will pass onto either a liquidator of your choice, if you are pursuing a voluntary liquidation, such as a Creditors’ Voluntary Liquidation (CVL), or an Official Receiver (OR), if the courts impose liquidation.
Regardless of your particular liquidation method, your liquidator will essentially take charge of your company. They will communicate with outstanding creditors, assist with documentation, and liquidate the assets and accounts of your company. Funds raised from this liquidation will then be distributed amongst creditors, then if there is anything left, shareholders. In addition to this responsibility, your liquidator or OR will open an investigation into your company’s directors to look for misconduct.
Investigation into director conduct
As part of this investigation, directors will be required to attend interviews with the liquidator, provide documents relevant to the company’s finances, and provide a statement of affairs. Directors may also be asked to attend a court for examination, but this is typically done when a director is suspected of misconduct, and is not a usual part of the investigation process. Generally, this is only a formality, resulting in your liquidator confirming with the Insolvency Service that director conduct was not a factor in the company’s financial problems. However, there are times when misconduct is found, and legal action will be taken against the guilty directors.
Implications for a company director’s personal finances
In most cases, a company director’s personal finances will be off the table during liquidation. The liquidator will raise funds through the sale of company assets and through the emptying of company accounts. These funds will be distributed amongst creditors, and any remaining debt will be written off. The personal finances of company directors will not be touched to cover the remaining debt.
However, while this is true in most cases, there are some exceptions to the rule. Any directors found guilty of misconduct may be forced to pay company debt from their personal finances as part of their punishment. The second exception to the rule is when a personal guarantee is signed as part of a loan agreement. For any loans secured by a personal guarantee, the signatories will be expected to pay out of their own personal finances.
Can I still be a director if I liquidate my company?
In addition to the above implications, liquidating a company can have some impact when starting a new company. Before you embark on your next business venture after liquidating a previous company, you should first know how liquidating an old company might affect you.
Generally, it is possible to be a director after liquidating an old company. However, some exceptions exist; director misconduct and company names being the most prominent. Assuming you aren’t found guilty of misconduct, you can act as a director of a company in the future, in addition to holding management positions in other companies. Being found guilty of director misconduct will bar you from holding any management position for a period of up to 20 years.
Although you can continue to act as a director, there are a few restrictions you must abide by if you intend to found a new company. Firstly, you must not use the same name as your previous company, nor can you use a similar name to which the public or creditors can draw a connection. If you fail to adhere to this rule, you risk legal action being taken against you. Secondly, you mustn’t create another company if you are currently banned from being a company director. Once your directors’ license suspension has elapsed, you may create a new company or hold a management position in another.
Director responsibilities during liquidation
As a director can be suspended from holding management positions for misconduct, it is vital that your company’s liquidation is executed in line with the law. To ensure this, there are a few responsibilities that you, as a director, should uphold.
Sign a winding-up resolution
If you intend to pursue company liquidation, you must first gain the consent of your fellow shareholders, if there are any, then sign a winding-up resolution. You should meet with your shareholders, explain why liquidation is the best procedure, and agree to the resolution. Once this resolution is signed, you should appoint a liquidator and attend interviews with them, should you be asked.
Halt company operations
Once you decide to place your company into liquidation, you must stop trading in short order. Exactly when you should stop depends on your company’s financial position. You should consult your licensed insolvency practitioner to find out whether you should immediately stop trading, or whether you have some wiggle room. Failing to stop trading when you should can result in significant consequences for company directors.
Provide necessary documentation
To ensure your liquidation progresses smoothly and quickly, you should have all the necessary documentation at the ready. HMRC needs detailed documentation about company affairs if it is to undergo liquidation, and your insolvency practitioner will need them to fulfil its duties. Having this documentation accurate and available before starting liquidation will ensure the procedure is not delayed by documentation requirements.
Clarke Bell can help
If you intend to place your company into liquidation, don’t go it alone; let Clarke Bell help. We have more than 28 years of experience in helping companies find the best solutions to their financial problems, and we can do the same for you. Contact our team today for a free, no-obligation consultation, and find out exactly what we can do for you.