While liquidation signals the end of your company, your directorial conduct in the lead-up to and during the period of insolvency will be investigated as part of the process. How you’ve run the company in that time will determine whether you face further consequences or if you can walk away and start afresh.
Your actions as director before liquidation
As the company’s director, you should always act in that company’s best interests, doing your utmost to minimise creditor losses.
If your company is insolvent and you enter a formal insolvency process, the insolvency practitioner will look into your actions leading up to that point.
Don’t let this put you off speaking to a licensed and regulated insolvency practitioner. Actively seeking help from one is a way of acting in your company’s best interests. They can assess your company’s situation and advise you on the best route forward.
Seeking help as soon as possible reduces the risk of trading whilst insolvent, wherein the insolvent company continues trading as if it were solvent. This can even lead to you being accused of wrongful trading, which could potentially bypass the company’s limited liability protection and make you personally liable for your company’s debts.
While it might be possible for the company to recover, if creditor pressure has reached a point where continuing to trade is unfeasible, the best route forward may be through a Creditors Voluntary Liquidation (CVL).
During the liquidation
Once in liquidation, your company and its assets are controlled by the insolvency practitioner, with funds distributed pro rata to the company’s creditors in the order designated by the repayment hierarchy:
- Secured creditors with fixed charges
- Banks & lenders
- Landlords
- Preferential creditors
- Employees
- VAT, PAYE, student loans, and employee National Insurance debts to HMRC
- Secured creditors with floating charges
- Works in progress
- Stock
- Unfactored debts
- Unsecured creditors
- Suppliers
- Contractors
- Customers
- Employer National Insurance contributions and Corporation Tax to HMRC
- Shareholders
One of the first pieces of insolvency advice you should receive is not to pay one creditor in preference over any others. Doing so would constitute creditor preference, which would be negating your duties as director, and can lead to problems later.
Once the company enters liquidation, all creditor pressure ends, with the remaining debts written off, and the company itself ceasing to exist.
Post liquidation
After the company is liquidated, in most circumstances, you can move on and start afresh, potentially founding a new limited company.
Again, your conduct in your time as director, specifically, whether you’re guilty of any misconduct, will determine whether you face any longer-lasting consequences. For example, if you continued to trade while the company was insolvent, you could face accusations of wrongful or fraudulent trading.
If you’re found to have acted outside of the company’s best interests, you could be held personally liable for the company’s debts. Additionally, if you’ve signed any personal guarantees in your time as director, you’ll be held liable for those if the company cannot repay them.
Summary
You should take action as soon as you become aware that your company is insolvent. Contact a licensed and regulated insolvency practitioner to discuss your options. If liquidation is the best route forward, the insolvency practitioner will review your company’s history, assets and your actions as director leading up to and during the company becoming insolvent. If you acted in the company’s best interests and you don’t have outstanding personal guarantees, you can move on after the liquidation. If not, or if there are guarantees outstanding, then you could be held personally liable for a portion of the company’s debts.
