Once a Winding Up Order is issued the Court will appoint a Liquidator. The Liquidator will then start to close the company immediately. The directors may be liable for some company debt. Employees will be dismissed.
- After Winding Up will Directors be liable for company debt?
- What happens to Director’s Loan Accounts?
- The affect of Winding Up on Employees
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Director’s liability for Company Debt after Winding Up
If a company is closed with a Winding Up Order the Directors are not generally liable for the outstanding debts. This is because of the rules of limited liability. However any director who has personally guaranteed a company debt will be liable to pay this.
Directors personal guarantees have become common over recent years. Generally a bank will not offer credit facilities such as a loan, overdraft or credit card without such a guarantee.
If the company is closed and these debts remain outstanding the directors who signed as guarantors then have to pay the balance from their own pocket. The bank will take legal action to enforce payment of the debt if required.
Directors liability for Loan Accounts after Winding Up
Directors are personally liable for any money the company has loaned to them. These debts are shown in the company accounts as Director’s Loan Accounts.
In particular these Loan Accounts will exist if Directors have taken drawings from the company in the form of dividends when there was no profit. Dividends can only be paid out of profits and as such should not have been issued. In affect the directors have just borrowed money from the company.
Once a Winding Up Order is issued the company is forced to close. Any Director’s Loan Accounts will therefore remain unpaid. The Liquidator will take legal action if necessary to ensure that these funds are returned to the company by the associated Directors.
If a company is Wound Up and Director’s Loan Accounts and personal guarantees exist the directors may need to use a personal debt solution to resolve the issue.
Investigation of Company Director Conduct
Once they have been appointed one of the duties of the Liquidator is to report on the conduct of the Directors. The report is sometimes referred to as a D1 or D2 report. This is after the forms that the Liquidator completes and submits to the Insolvency Service.
If the liquidator feels that any director has been involved in conduct which makes them unfit to continue as directors a D1 report will be submitted. This will recommend the Insolvency Service further investigate the issue.
If having carried out an investigation the Insolvency Service may believe that a director is at fault. The accusations must then be presented at a Court Hearing. If upheld the director will be disqualified from all company directorships for up to 15 years. They may also be held personally responsible for company debts.
The liquidator is required to report on any person who has acted as a director of the company for the past 3 years. In addition they will report on any person who seems to have acted in the capacity of a director. This person may not be formally registered at Company’s House.
The affect of Winding Up on Employees
When a Winding Up Order is issued the company will be closed. As a result the Liquidator will have to make all the employees redundant. Generally they will be dismissed immediately. However the liquidator may keep some employees on for a limited time. This would be to help preserve the value of company assets before they are sold.
The employees will be eligible for redundancy payments. However if the company is insolvent there may not be enough funds to pay full redundancy packages.
Employees are entitled to preferential redundancy pay (after the liquidator’s fees) of up to £800. Anything owed over £800 owed is treated as unsecured company debt. As such it is unlikely to be paid if the company is insolvent.