Director responsibilities during insolvent liquidation must be managed sensitively.
Failure to act in a prescribed way could result in accusations of wrongful or unlawful trading further down the line. The result of which could be a penalty, a director restriction or disqualification or even personal liability for a proportion of the company’s debts.
Once a company becomes insolvent, the directors’ responsibility shifts from being to the company’s shareholders or members, to its creditors.
The company must consider ceasing to trade immediately and safeguard its assets in the interests of the creditors. The company should only continue to trade, if to do so would bring some benefit to creditors.
Acting responsibility from the moment you realise the company is insolvent is essential to removing the threat of personal liability.
Cease Trading When You Realise Company is Insolvent
The moment you realise your company is insolvent, you should stop trading. Do not send out any more products, issue any invoices, pay any staff, or attempt to seek finance and do not take any additional credit.
Any action at this stage that is not in the clear interests of company creditors could put you at risk of accusations of wrongful trading.
Company liquidators have a legal mandate to investigate the behaviour of directors during the period leading up to the liquidation.
Where wrongful trading can be proven, directors could face a restriction or disqualification order which would prevent serving as a company director for a minimum of 5 years.
Where fraudulent trading is proven, more serious repercussions such as fines, penalties, and even a prison sentence are potential consequences.
Director’s Powers Cease
Directors powers cease once the Liquidator has been appointed, unless specifically instructed by the liquidator. Directors are however obliged to cooperate with the liquidator.
Hold a Shareholder Meetings
When the liquidation is voluntary, directors must call a meeting of shareholders, just before the creditors meeting to vote on the ‘winding up’ of the company. At least 51% of shareholders must vote to pass the resolution.
Advertise the creditors meeting
The legal notice calling the creditors meeting must be advertised in 2 daily newspapers at least 10 days before the meeting date.
Appoint an Insolvency Practitioner
Appointing a licensed insolvency practitioner (liquidator) is a legal requirement at this stage.
Usually, the company accountant or solicitor will have a prior relationship with an insolvency practitioner which determines the selection, but failing that you should look for someone who can demonstrate experience with insolvencies in your business niche.
Director’s Duty to Prepare Statement of Affairs
Preparing the Statement of Affairs in insolvency is one of the final key roles of the director and a key handover document to bring the liquidator up to date on the situation.
This document should breakdown the company’s current financial situation and include asset valuations, a recent balance sheet, a list of employees, creditors and suppliers, and full details of debts.
Director’s Duty to Cooperate with Liquidator (Office Holder)
Limited Company Directors have a legal duty, once insolvent, to deliver any books and records and information for that the liquidator requires for the purposes of his/her investigation.
Company Directors Must Agree to be Interviewed by the Liquidator
As part of the liquidation proceedings, the liquidator may ask for an interview with the company directors.
You are legally obliged to attend the interview and answer the liquidator’s questions to the best of your ability.
If the interview gives the liquidator cause for concern about the way the business was run, or you fail to comply with the liquidator’s requests, allegations of misconduct could be made and may result in a restriction.
Directors’ Loan Accounts
A directors’ loan accounts which shows that a director owes money to the company will usually be regarded as an asset in an insolvency situation that must be repaid for the benefit of the company’s creditors. In some cases, directors’ loans that have been written off in the company’s accounts can be reinstated by the liquidator.
This is often the case if the loan contributed to the demise of the company in any way.
If you are unable to repay the loan from your personal funds, you may have to follow a personal insolvency route such or Personal bankruptcy.