What Happens to a Director of a Company in Liquidation?
If your company is struggling to pay its debts and has failed to turn its business around, liquidation could be the only remaining option. Liquidation sees assets sold off to pay creditors, before business operations cease and the company is struck from the Companies House register.
It can be a stressful time for all involved, including the directors who may be seeing all their hard work and investment end in liquidation. But what happens to a director of a company in liquidation? In this article, we explain what a company director should expect to happen to them when their company is liquidated.
What Happens When a Company Is Liquidated?
Liquidation is a formal, legal process that results in the winding-up of a company. It’s most commonly used as a response to insolvency, but it can also be used to quickly close down a company while still making a profit.
There are three main types of liquidation:
- Members’ voluntary liquidation (MVL): a voluntary winding up of business in order to realise a profit.
- Creditors’ voluntary liquidation (CVL): a voluntary winding up of business in order to pay creditors.
- Compulsory liquidation: an involuntary winding up of business that occurs when creditors force a company into liquidation to recoup money owed to them.
When a company is liquidated, it’s closed down. Assets are sold off in order to either pay the creditors or realise a profit for the shareholders, employees are made redundant and the business is struck from the Companies House register.
But what happens to a director of a company in liquidation? Let’s look at that in more detail.
What Happens to a Director of a Company in Liquidation?
Exactly what happens to a director of a company in liquidation depends on a number of factors, including the type of liquidation.
If a company is undergoing a members’ voluntary liquidation, then this occurs with the agreement and direction of the directors. An MVL needs no court orders and can be accomplished without relinquishing control of the business. It’s a case of selling assets, closing the company down and taking profits. In this example, there’s little to worry about, and directors are able to take their share and move on to their next project.
If your company is undergoing a creditors’ voluntary liquidation or compulsory liquidation, the process won’t be quite so simple. A CVL or compulsory liquidation process can only occur when your business is insolvent, which means you owe money to creditors. This has more serious implications, and the Insolvency Service may call your conduct into question.
As the director of a company, you can expect a few things to happen when your company enters into liquidation as a result of insolvency.
You Lose Control of Your Company
If your company enters into the liquidation process because of insolvency, you will lose control of your company.
Both the CVL and compulsory liquidation processes are overseen by a licensed insolvency practitioner. While they consider the directors’ inputs, they are working in the interests of the creditors.
You’ll have little control over how the company is closed down, and where and for how much the assets are sold. This control is lessened further if you are forced into compulsory liquidation.
You May Be Entitled to Redundancy Pay
When a company is liquidated, its employees and members of staff are often entitled to redundancy pay. This depends on their employment status within the company, how long they have worked there, etc.
Directors are often classed as company employees too, so they may also be entitled to redundancy pay at the end of the liquidation process. This will depend on whether the company pays you a salary, and if there is any money left over after the preferential creditors have been paid.
Your Conduct May Be Investigated
As part of the liquidation process, your conduct as a director may be assessed and reviewed. This is likely to happen if anyone makes allegations of fraud or misconduct against you, or if the insolvency practitioner or Insolvency Service believes you have acted fraudulently, illegally, or against the best wishes of the company.
In extreme cases, the Insolvency Service has the power to disqualify you as a director for up to 15 years. In serious cases of fraud, you could also be prosecuted. We should note that disqualifications are quite rare, and if you’ve conducted yourself above board then you should not have to worry about an investigation.
Is a Director Personally Liable for Their Company’s Debts?
One of the most common questions we’re asked, is what happens to a director of a company in liquidation in regards to personal liability?
If you are the director of a limited company, you have limited liability in this respect. This means that the company’s assets and liabilities are not yours, and you would not have to pay the company’s debts out of your own pocket during the liquidation process.
However, in many cases directors may have some degree of personal liability. This can be the case if you’ve secured your personal assets, such as a house or car, against loans you’ve invested into the company. You can also take on personal liability if you are deemed to have acted fraudulently or illegally.
Can I Be a Director of Another Company After Going Through Liquidation?
Unless you have been disqualified by the Insolvency Service for misconduct leading to insolvency, there’s nothing stopping you from becoming the director of a company again in the future. Even if you are disqualified, once your disqualification period has legally ended, you could become a director again.
Unfortunately businesses fail, but as long as you’ve conducted yourself legally and in the best interests of the company throughout your tenure as director, you should not be penalised for this.
However, you should also remember that reputation is important in the business world. If your business ventures constantly end in insolvency, you may find it becomes more difficult to secure favourable credit agreements and loans in the future.
Contact Irwin Insolvency for More Information on the Liquidation Process
Irwin Insolvency has over 25 years’ experience providing expert advice to struggling businesses and companies.
Our expert team of insolvency practitioners has the experience and knowledge to help you through the liquidation process.
If you need to know more about what happens to a director of a company in liquidation, contact Irwin Insolvency today for more information.