Liquidation and Directors

After liquidation Directors are not usually held responsible for the payment of company debts. In addition their ability to be a director of other companies is not normally affected. However there may be other implications.

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Are Directors responsible for Company Debts after Liquidation?

When an insolvent company is liquidated there are usually insufficient funds to pay all the unsecured debts. However the directors are not then responsible for paying the outstanding creditors.

As standard the responsibility of shareholders and directors for a company’s debts is limited to the investment they made into the business. Creditors of the company cannot normally pursue the directors. They have no legal right to take action against directors to force debt repayment.

There is one exception to a directors limited liability for company debt. This is where a director has signed a personal guarantee. In these circumstances after a company is liquidated the creditor can call on the guarantee. The director can then be legally forced to pay the debt.

What happens to Outstanding Director’s Loans after Liquidation?

Very often the directors of a limited company take a portion of their remuneration as dividends. This situation works well if the company is profitable. However if directors draw dividends when a company is not in profit these payments are accounted for as an outstanding loan from the company.

After a company is liquidated any outstanding director’s loans must be repaid. The liquidator will pursue the directors personally for the repayment of these debts. If necessary they can enforce repayment by taking court action against the directors concerned.

Given this before liquidating a company it is wise to check the status of the directors current account. If there are directors loans outstanding a plan must be made in advance regarding how these debts will be managed.

Are Directors disqualified after Liquidation?

The directors of a liquidated company are not automatically disqualified. They can continue in their roles as directors of other companies. They are also free to take up new directorships.

The Liquidator must report on the general conduct of the directors. The liquidator is required to report on any person who has acted as a director of the company for the past three (3) years. In addition any person who seems to have acted in the capacity of a director.

The report is submitted to the Insolvency Service. If the liquidator believes a director has knowingly allowed the company to trade while insolvent this is recorded an a standard reporting form called D1. The Insolvency Service may chose to investigate further if they believe there is sufficient evidence of wrongful trading. However directors cannot be accused of simply mismanaging a company. Wrongful trading relates to the specific act of wilfully allowing a limited company to trade while it is insolvent.

If the Insolvency Service believe a director has acted improperly they can apply to the court to have the that individual struck off of the register of directors. An application could also be made to hold the director personally responsible for company debts.

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