Directors protection during Compulsory Liquidation Once a company has been liquidated either through a Creditors Voluntary Liquidation or winding up, the liquidator will produce a report on the conduct of all of the directors in the period running up to when the business stopped trading. If they believe the Directors did not act in accordance with their duties then they will indicate that they believe the Directors were guilty of wrongful trading. If this accusation is upheld, the directors in question can be made personally liable for the company's debts. They may also be banned from being a director. How do you minimise this risk?
If you are a director of a company which is struggling and you feel that there is no possibility of turning the business around, you will need to formally close the company down. The process for doing this is known as Liquidation. The Liquidation process will require realising the assets of the company and distributing any proceeds to the company's creditors. Any cash left over is returned to the shareholders. The company is then closed, any outstanding leases cancelled and remaining staff made redundant.
Depending on the status of the business there are different types of Liquidation. Should your business be in a position to repay all the people it owes money to, then you will be able to liquidate the company using the Members Voluntary Liquidation (MVL) process. This is a simple process where the business is closed and all creditors paid in full. Any remaining assets or cash is then the property of the shareholders of the business to do with as they wish.
More commonly, especially in the current economic climate the decision will be taken to liquidate a business because it is no longer a viable trading entity. The company may have run out of cash and owe more money to creditors than it cannot afford to pay. If no further options for raising investment can be found the business is forced to stop trading. In these circumstances the directors could initiate a Creditors Voluntary Liquidation (CVL) themselves. Alternatively they could simply leave the company dormant until it is forced to liquidation by one of its creditors (often the Inland Revenue) through a winding up order (compulsory liquidation).
It should be noted that once a company is liquidated by either of these options, the liquidator will report on the conduct of the Directors in the period up until it stopped trading. If the liquidator believes that the directors did not act properly during this period (particularly in the area of minimising the creditors losses), then they can accuse the directors of wrongful trading. If this is upheld then directors could be banned from being a director in any new or existing business, and face personal liability for the company's debts.
A Director will want to make sure they minimise the possibility of being reported for wrongful trading. It is normally the case that, where the directors of the business have initiated the closure of the business through a creditors voluntary liquidation, they are much more likely to be able to show the liquidator that they have acted properly. However, if directors seemingly abandon their duties and leave the company to be wound up, it is far more likely that the appointed liquidator will take a less favourable view of their conduct.
I think from this it is clear why, when I am asked by directors whether it is better to initiate a creditors voluntary liquidation process or simply abandon the company and wait for it to be compulsorily wound up, I always recommend the CVL route. In this way the directors are far more in control of the process and the risk of wrongful trading and disqualification is decreased.
What happens to the directors if a company is wound up?
Once a company is being wound up a Liquidator will be appointed. The liquidator will undertake an investigation into the conduct of the directors to see whether they have knowingly allowed the business to trade while insolvent thus making the creditor's position worse. If this is the case, a director may face being disqualified and held personally liable for the company's debts. As a Director we look at the options you have.
What will having a County Court Judgement do to my company
If a county court judgement remains unpaid, this could lead to more serious action being taken against the business. We look at the impact and what you can do.
Company debt restructure to improve cash flow
Ensuring that enough cash is available to maintain their business must be a priority for companies. Those that do it well will survive. Those that do not are likely to fall. As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority. We discuss some of the solutions available.
