Post Liquidation worries are a result of countless misunderstandings regarding company insolvency, many struggling directors worry unnecessarily about the effects it can have on them personally. Directors often take advice from people with little experience in insolvency matters (such as “the man in a pub”) which can lead to decisions not being made in a timely manner. This delay in taking action can lead to negative consequences and directors finding themselves in murky water. A delay in seeking independent advice from an expert can in fact put directors in the position that they were trying to avoid.
Creditors Voluntary Liquidation
Put simply, Creditors Voluntary Liquidation refers to a company ceasing to trade and its assets being sold or “liquidated”. This money raised is distributed to creditors subject to liquidation costs being paid. If the company has few or no assets, liquidation costs will need to be funded personally by the directors.
Potential liabilities, such as rent to landlords, money owed to trade creditors, payments for leases and employment implications, in most cases cease when the company enters liquidation. The process is an effective way to stop pressure from creditors and meet the responsibilities and obligations of the director. From a personal point of view it effectively allows the directors to move on with their lives. Whilst liquidation means the effective “end” of a company, it is possible the ‘business’ may live on if a phoenix company is set up that purchases the assets of the old company for a continuation of trade. There are, however, very strict restrictions imposed when setting up a phoenix company and advice should be sought
The implications of liquidation on company directors
The term ‘limited’ when referring to a company means the directors have minimal risk and ‘limited liability’ should the company fail. Of course, limited liability only applies if the directors have acted in a proper manner.
Failing to act correctly and in a timely manner, not keeping books and records up to date and increasing the amount owed to creditors with knowledge that the company is unable to pay these debts back, can result in a director being exposed to personal liability. Acting as detailed above is known as ‘wrongful trading’ and if such wrongful conduct is proven by a liquidator the director may be held personally liable for the company’s debts from the point that the director knew or ought to have known the company was technically insolvent. One example of such wrongful trading would be if a company was accepting deposits from clients, knowing they could not deliver the goods or services expected or taking credit from suppliers, knowing they are unable to make repayments. Consequently, taking action as soon as a significant financial problem has been identified can help avoid worsening the position of creditors and reduce a director’s risk of personal liability.
The most efficient and quickest manner to deal with a company’s insolvency, which cannot be rectified, is Creditor’s Voluntary Liquidation (CVL). Directors are at risk if they fail to deal with their company’s insolvent position as quickly as possible and it is therefore in their interests to act swiftly. The longer they fail to act, the greater the risk of being held personally liable.
If a director does not act within an appropriate timescale and the company is ultimately wound up by creditors who have issued a winding up petition, the company will be forced into Compulsory Liquidation. The Official Receiver (OR) will be appointed initially but he/she may choose to pass the responsibility of liquidating the company to an independent insolvency practitioner (IP). The OR or IP will investigate the actions of the directors and the company in general, this process is referred to as ‘preparing a conduct report’. Amongst other matters the Liquidator will consider:
- Whether the director(s) continued to trade whilst knowingly insolvent
- Whether the company has not got up to date company accounts.
- Whether the director(s) have taken credit whilst knowing they are unlikely to be able to repay the debt.
If any issues are identified it is likely the company directors may be in some way personally liable for the company’s debts from when the director had reasonable knowledge that the company was insolvent. This situation is often referred to as “the lifting of the veil of incorporation”, which usually protects directors of limited companies. If this does occur a director may be liable for some or all of the debts created from the moment when they should have been aware that the business had little chance of surviving.
Furthermore, under an act known as the Company Directors Disqualification Act 1986, it may be possible for a director to face disqualification proceedings for as many as fifteen years following the date of disqualification, which would preclude him or her from acting as a company director.
Directors may not always be aware that they have violated any laws. However, if you are a director and after reading this article you think that your company is in danger of committing an offence, it is essential to give yourself protection as a company director by quickly taking the necessary steps to cease trading and place the business into voluntary liquidation. Alternatively, if the company could be considered viable if its problems were rectified, you could consider a company voluntary arrangement (CVA).
If directors, shareholders or anyone else involved in the company have signed personal guarantees, they will be personally liable for whatever debts they guaranteed which are not repaid in the liquidation process. If you or anyone else involved in the company have personal guarantees it is always advisable to seek advice as quickly as possible.
It is common for banks to agree a deal that the personally guaranteed debts are repaid over a period of time, though this will mean the director cooperating with the bank to limit its exposure.
What happens next?
It is important to ensure that all annual returns, including VAT and tax returns, are completed and sent in. Other issues regarding compliance should also be dealt with accordingly. These vital procedures will help protect company directors as it shows they have acted responsibly.