What happens to the directors if a company is wound up?
If a limited company is wound up, the directors could be liable for its debts if they have allowed the business to trade while it was insolvent.
Winding up is the forced closure of a company. The process is normally started by one of the company's creditors because outstanding debts have not been paid.
If a company is wound up, it is unusual for the creditors to receive payment for their debt. For this reason, a creditor's main objective is to stop the company from trading in the future and to force an investigation into the conduct of the directors.
Company directors investigated in Winding Up
The liquidator must carry out an investigation into the conduct of the company directors if the business is wound up.
This investigation is undertaken on any current director or anyone who has been a director of the company in the last three years. The liquidator can also investigate any individual who has acted in the capacity of a director although not registered as such at Companies House.
The purpose of the investigation is to understand whether or not the company directors have acted properly in their management of the company.
The liquidator will look especially carefully to see whether any or all of the directors have allowed the company to trade while knowing that it was insolvent – wrongful trading. Wrongful trading is a serious breach of a director's duties.
Actions against directors of insolvent companies
Once the liquidator has completed their investigation, they will submit their report on the directors' conduct to the Insolvency Service. This is known as a directors' disqualification report or D1.
If the liquidator believes that any director has been involved in wrongful trading, they will recommend that the insolvency service take action against the director.
The insolvency service will consider two main actions:
- Director disqualification - If found to have allowed a company to trade while insolvent, a director could be disqualified from continuing to act as a director for other businesses. If disqualified, a director will have to stand down from any other directorships they hold. The ban may last for a year or longer depending on the conduct of the director
- Personal liability for company debt - A director accused of wrongful trading can be held personally liable for debts incurred by the company after the director knew that the business was insolvent. This may have serious implications on the director's personal financial situation
Because of the possibility that a director may be disqualified or held personally liable for a company's debts, winding up is an extremely serious process for company directors.
For this reason, if as a company director, you believe that your business is struggling financially and may be at risk of trading while insolvent, you should take professional advice as soon as possible.
If the business should be closed, the directors will be far better protected if they initiate the process themselves using voluntary liquidation. However, alternative solutions can also be considered such as a company voluntary arrangement which will both save the business and protect the directors from any investigation at all.
If as a Director your business is in financial difficulty why not talk to us about solutions, more info at
http://coopermatthews.com/voluntary-liquidation.html
http://coopermatthews.com/company-voluntary-arrangement.html
Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses, working with Directors, Sole Traders and Self Employed.
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