A Guide to Directors’ Responsibilities in Liquidation

Directors of a company have a number of responsibilities during the liquidation process. The first and foremost responsibility of directors during liquidation is to act in the best interests of the company and its creditors.

This means that they must take steps to ensure that the company’s assets are sold for the best possible price and that the proceeds of the sale are used to pay off the company’s debts.

In addition to this, directors must also ensure that the liquidation process is carried out in a fair and transparent manner, and that all creditors and shareholders are treated equally. This includes providing regular updates on the progress of the liquidation and keeping accurate records of all transactions.

Directors must also ensure that all necessary legal and regulatory requirements are met during the liquidation process. Failure to discharge these responsibilities can result in personal liability for the directors

Directors’ duties and liabilities during the course of insolvency UK

In the UK, directors of a company facing insolvency have a number of duties. These duties are set out in the Companies Act 2006 and the Insolvency Act 1986, and are designed to protect the interests of the company’s creditors and shareholders.

One of the primary duties of directors during insolvency is to act in the best interests of the company and its creditors. This means that they must take steps to ensure that the company’s assets are sold for the best possible price and that the proceeds of the sale are used to pay off the company’s debts.

Directors must also ensure that the insolvency process is carried out in a fair and transparent manner, and that all creditors and shareholders are treated equally. In addition to these duties, directors may also be personally liable for the company’s debts if they are found to have acted improperly during the insolvency process.

This includes engaging in fraudulent or dishonest conduct, or failing to disclose material information to the company’s creditors. It is therefore important for directors to be aware of their responsibilities and to act diligently during the course of insolvency.

(1) Cease Trading When You Realise Company is Insolvent

If a company realises that it is insolvent, meaning that it is unable to pay its debts as they come due, it is important for the directors to take immediate action to cease trading. Continuing to trade while insolvent can have serious legal and financial consequences for the company and its directors.

One of the primary reasons to cease trading when a company becomes insolvent is to protect the interests of the company’s creditors. By ceasing trading, the company can focus on finding a solution to its financial difficulties and attempting to pay off its debts. This can help to minimize the losses suffered by the company’s creditors and may also help to preserve the company’s assets for the benefit of its creditors.

In addition to this, continuing to trade while insolvent can also expose the directors to personal liability for the company’s debts. This is because the directors have a legal duty to act in the best interests of the company and its creditors, and failing to cease trading when the company becomes insolvent may be seen as a breach of this duty.

Therefore, if a company realises that it is insolvent, it is important for the directors to take immediate steps to cease trading and seek professional advice on the best course of action

(2) Director’s Powers Cease

As per Section 103 of the Insolvency Act 1986, company directors cease to hold directorial powers once an Insolvency Practitioner has been appointed to manage the company’s affairs. This means that the directors are no longer responsible for making decisions on behalf of the company and must hand over control to the Insolvency Practitioner. The Insolvency Practitioner is responsible for managing the company’s assets and liabilities, and for overseeing the insolvency process.

The directors may, however, be instructed by the liquidator to continue to perform certain duties on behalf of the company. This may be necessary if the directors have specific skills or knowledge that are needed to assist with the liquidation process. In these cases, the directors will be given specific instructions by the liquidator and will be required to follow them in order to ensure the smooth and orderly winding up of the company.

(3) Hold a Shareholder Meetings

Once the limited company has ceased trading, the directors are required to call a meeting of shareholders in order to vote on the winding up of the company. This is known as a voluntary liquidation and is typically initiated when the directors believe that the company is no longer viable and that it is in the best interests of the shareholders and creditors to wind up the company.

In order for the special resolution to pass, at least 75% of the shareholders must vote in favor of the winding up. After the resolution has been passed, the company must notify Companies House using a form such as Form IN01. This form must be completed and filed within seven days of the resolution being passed. Once the form has been filed, the liquidation process can begin and the company’s assets will be sold off and used to pay off its debts.

(4) Appoint an Insolvency Practitioner

Appointing a licensed insolvency practitioner, also known as a liquidator, is a legal requirement at the stage of winding up a limited company. The liquidator is responsible for overseeing the liquidation process and ensuring that it is carried out in a fair and transparent manner. They are also responsible for managing the company’s assets and liabilities and for distributing the proceeds of the sale of the company’s assets to its creditors.

The appointment of a liquidator is typically required in both compulsory and voluntary liquidations, and the liquidator must be licensed by the Insolvency Practitioners Association (IPA) or the Insolvency Practitioners Regulation Authority (IPRA). It is important to ensure that a qualified and experienced liquidator is appointed to manage the liquidation process, as this can help to minimise the losses suffered by the company’s creditors and ensure that the process is carried out efficiently.

(5) Director’s Duty to Prepare Statement of Affairs

Preparing the Statement of Affairs is one of the final key roles of the director during the insolvency process. The Statement of Affairs is a document that provides a detailed overview of the company’s financial position, including its assets, liabilities, and outstanding debts. It is a key handover document that is used to bring the Insolvency Practitioner (IP) up to date on the company’s situation and to help them understand the financial position of the company.

The Statement of Affairs is typically prepared by the director and is based on information provided by the company’s financial records and accounts. It should be as accurate and comprehensive as possible, as the IP will use it to determine the best course of action for dealing with the company’s insolvency. The Statement of Affairs should include information such as the company’s assets, debts, and liabilities, as well as details of any outstanding contracts or agreements. It is important to ensure that the Statement of Affairs is completed and submitted to the IP as soon as possible, as it is a crucial tool for understanding the company’s financial position and for devising a plan for dealing with its insolvency.

(6) Director’s Duty to Co-operate with Liquidator (Office Holder)

Limited company directors have a legal duty, once the company becomes insolvent, to deliver any books and records and information that the liquidator requires for the purposes of their investigation. This includes all financial records, such as accounts, invoices, and receipts, as well as any other relevant documents or information. The directors are required to provide this information in a timely manner and must cooperate fully with the liquidator in order to ensure that the liquidation process is carried out smoothly and efficiently.

Failure to provide the necessary books and records and information to the liquidator can have serious consequences for the directors. It may result in personal liability for the company’s debts or in legal action being taken against the directors. Therefore, it is important for directors to be aware of their legal duties and to take steps to ensure that they are fulfilling them. This may involve seeking professional guidance or legal advice in order to understand their obligations and to ensure that they are meeting them.

(7) Company Directors Must Agree to be Interviewed by the Liquidator

As part of the liquidation proceedings, the liquidator may ask for an interview with the company directors in order to gather more information about the company’s financial position and to understand the circumstances leading up to its insolvency. The directors are legally obliged to attend the interview and to answer the liquidator’s questions to the best of their ability. This may involve providing detailed information about the company’s assets, debts, and liabilities, as well as any other relevant information.

It is important for the directors to cooperate fully with the liquidator during the interview process and to provide accurate and honest answers to the questions being asked. If the interview gives the liquidator cause for concern about the way the business was run, or if the directors fail to comply with the liquidator’s requests, allegations of misconduct could be made and may result in an Insolvency Service investigation. This could have serious consequences for the directors, including personal liability for the company’s debts or potential legal action. Therefore, it is important for directors to be aware of their legal obligations and to take steps to ensure that they are meeting them.

(8) Convening the Deemed Consent Procedure (Replaces Former Creditors Meeting)

Formerly, directors of a company in liquidation would have been required to call a meeting of creditors in order to gain their consent on various matters related to the liquidation process. However, recent changes in the law have altered this process and have introduced a new procedure known as the “Deemed Consent Procedure.”

Under the Deemed Consent Procedure, the director of the company (also known as the convener) asks the Insolvency Practitioner (IP) to convene the procedure in order to gain the consent of the creditors on matters such as the appointment of the Liquidator. The IP will then send a notice to all of the creditors, inviting them to object to the proposed course of action. Unless more than 10% of the creditors object, the proposed action will be deemed to have received the consent of the creditors and can proceed.

This new procedure is intended to streamline the process of gaining creditor consent and to reduce the burden on directors, who no longer need to convene a physical meeting of creditors. However, it is important for directors to be aware of their legal obligations and to ensure that the Deemed Consent Procedure is carried out in accordance with the relevant laws and regulations.

(9) Directors’ Loan Accounts

In an insolvency situation, overdrawn directors’ loan accounts are usually regarded as a debt that must be repaid for the benefit of the company’s creditors. This means that if a director has an overdrawn loan account with the company, they may be required to pay back the outstanding amount in order to satisfy the company’s debts.

In some cases, directors’ loans that have been written off in the company’s accounts can be reinstated by the liquidator. This is often the case if the loan contributed to the demise of the company in any way. If the director is unable to repay the loan from their personal funds, they may have to follow a personal insolvency route such as an Individual Voluntary Arrangement (IVA) or bankruptcy.

If the company accounts are such that the liquidator is unable to determine the value of an overdrawn director’s loan, the director may be investigated by the Insolvency Service. This can have serious consequences for the director, including potential legal action or personal liability for the company’s debts. Therefore, it is important for directors to be aware of their responsibilities and to act in accordance with the law when it comes to directors’ loans in an insolvency situation.

Read more: When would a director file for compulsory liquidation

Conclusion

In conclusion, directors have a number of important responsibilities during the liquidation process. They must act in the best interests of the company and its creditors, and must ensure that the liquidation is carried out in a fair and transparent manner. They must also provide regular updates on the progress of the liquidation and keep accurate records of all transactions. Directors must be aware of their legal duties and obligations, and must take steps to ensure that they are meeting them.

Failure to discharge these responsibilities can result in personal liability for the directors. It is therefore important for directors to be aware of their responsibilities and to act diligently during the liquidation process.