What happens to the directors if a company is wound up?

Winding up is the forced closure of a company, and is a process normally started by one of the company's creditors because outstanding debts have not been paid.

A review will be carried out by the liquidator on the actions of anyone who acted as a director of the company. This will be looking at whether they allowed the business to trade while insolvent.

A company being wound up is normally in financial trouble and therefore the creditors are unlikely to receive much return on the money owed. The creditor's main objective is to stop the company from trading and to force an investigation into the conduct of the directors. If they are shown to have been guilty of 'wrongful trading' then they will become personally liable for the debt.

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. Also under investigation will be anyone who appears to have acted like a Director even if they were not officially registered with Companies House.

What the liquidator is looking for is whether there has been proper management of the company. They will check if the directors allowed the business to continue to trade while knowing it was insolvent. This is a serious breach of the duties of a director and is called 'wrongful trading'.

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:

1. Where a director has been found to have allowed a company to trade while insolvent they could face Director Disqualification. This will mean they are banned from being a director for a year (sometimes longer) and will have to stand down from any other active directorships. This may well significantly impact their personal finance.
2. 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 would allow creditors of the company to pursue the directors personal assets and money for outstanding debts.

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.

Given the serious implications for directors, if your company has financial problems then 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.