What happens to directors of a dissolved company?

What happens to directors of a dissolved company?The purpose of this article is to examine what happens to directors of dissolved companies and how those circumstances can differ from those in liquidation cases.

It is relatively common to dissolve a company or strike off a business. Between 2020 and 2021, the government reports that more than 400,000 companies were dissolved.

It’s important to understand the difference between dissolution and liquidation before we examine what happens to directors of dissolved companies.

What is a dissolved company?

When a business is dissolved, its entry is removed from the Companies House register, which means that it no longer exists as a legal entity.

An important requirement is that the limited company must be solvent and have the ability to pay its debts. A solvent company may be struck off.

A company can be dissolved for many reasons. For example, the business might no longer be necessary, or the directors might want to retire.

An insolvent limited company may be closed by a compulsory or creditors’ voluntary liquidation (CVL).

Directors of dissolved companies

The following is what happens to a director of a dissolved company.

Directors of a dissolved company can be appointed directors of other businesses if the dissolution has been carried out in accordance with the Companies Act 2006 legislation.

Exceptions to this rule include instances of misconduct, which we will discuss shortly.

Consider one aspect in particular when considering what happens to a dissolved company’s director. The option of claiming director redundancy pay is removed by dissolving a business.

Dissolving a company is only possible if it is solvent. A company in financial difficulties might consider a company voluntary arrangement (CVA) rather than a CVL.

After reading this article, you’ll learn more about what happens to directors after a liquidation.

Unfit conduct and disqualification

 Sometimes, businesses are not dissolved in a legal and appropriate manner. Among those directors, there are some who strike off an insolvent company without following the liquidation process under the supervision of an official receiver, in an effort to hide misconduct that might disqualify them from office.

This could happen if the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act were not passed last year.

When there are concerns about possible unfit conduct on the part of directors of dissolved companies, this legislation allows the Insolvency Service to investigate.

A dissolved company’s directors could be disqualified from being directors for 15 years if there is evidence of negligence.

It is possible, as stipulated by the Company Directors Disqualification Act 1986, that a director of a dissolved company will face that fate.

What happens to directors after liquidation?

Compared to directors of dissolved companies, here are the circumstances for directors after liquidation.

Director’s conduct, especially in compulsory liquidations, is investigated to see if they performed their duties efficiently and without negatively impacting the company’s finances.

In the same manner as before, directors who commit misconduct may be disqualified.

Rather than when a company is dissolved, directors are entitled to claim redundancy pay when the company is liquidated. Redundancy is not triggered by being dismissed for fault.

The amount of redundancy pay received depends on:

  • Age
  • Rate of pay
  • Length of service (up to 20 years)

As of 6 April 2021, the maximum statutory redundancy pay is £16,320.

A members’ voluntary liquidation (MVL) is an alternative to striking off a solvent company. The tax-effectiveness of this method is obvious, just note that redundancy pay cannot be claimed after the dissolution of a solvent business.

What happens to a director of a dissolved business venture?

Upon dissolution of a company, its directors may subsequently take on a similar position at another firm, unless there is evidence of misconduct that disqualifies them from doing so.

Dissolution is only available to solvent companies. CVLs and CVAs are available as options for insolvent businesses.

In contrast to liquidation, a business cannot claim redundancy pay after being dissolved.

Please contact us if you’d like to know more about what happens to a director of a dissolved company, or if you would like any advice.

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