In any time of economic uncertainty, there’s likely to be an increase in companies going into liquidation. The recent collapse of Wilko has focused our attention on this issue, and no doubt many company directors are feeling nervous.
The position of a director of an insolvent company can be problematic in certain circumstances. In general, however, there shouldn’t be too much to worry about.
Insolvency for Limited Companies
Unlike a sole trader or a partnership, where the owner or partners may be held responsible for all liabilities, a limited company is a separate entity from its directors. As a director, you’re essentially an employee, rather than an owner, although some aspects of your role will be different.
When a company becomes insolvent, it has to stop trading, and a liquidator is appointed. From then on, the liquidator takes over all aspects of running the company, and the directors are no longer permitted to act on its behalf. They do still have some responsibilities, though, and this remains the case even if they resign after insolvency.
What Is Required of a Director During Insolvency?
The directors of a limited company being wound up by a liquidator are obliged by law to hand over all information they hold and make themselves available to be interviewed. They must also hand over all assets, records and paperwork to the liquidator.
The good news is that a director isn’t normally held responsible for the company’s debts, but there may be exceptions. This will most often be if they’ve acted as a personal guarantor for a loan, but it could also be because there’s an overdrawn director’s account.
Needless to say, a director will also be held responsible if they’ve involved in fraudulent or other criminal activities within the company. The liquidator will investigate the circumstances of the insolvency, and if a director proves to have acted inappropriately, they may be liable for company debts and be banned from holding a directorship for anything up to fifteen years.
This can be for reasons that aren’t criminal, such as failing to prioritise creditors, but any fraudulent activities may result in a prison sentence.
Is There Life After Liquidation for a Director?
As long as the liquidator finds no evidence of wrongdoing, there’s no reason why you can’t immediately become a director of another company. The main restriction is that you can’t set up a company with a name that’s the same or similar as the liquidated one. If Acme Trading Company goes under, you can’t simply start Acme Supplies.
Far better, though, is to avoid your company becoming insolvent in the first place. Since insolvency is often the result of problems with cashflow, it’s vital to ensure you have an efficient credit control system. Give me a call to find out if I can help you get problem payments flowing in and avoid having to think about liquidation.