What should a director do upon becoming aware that a company is insolvent?
A director has a duty to act in the best interests of the company, creditors and shareholders at all times. Continuing to trade and incurring debts when the company is, or will soon be, insolvent could result in the director becoming personally liable should the company go into liquidation.
A director should seek advice from a qualified insolvency practitioner as soon as he or she becomes aware that the company is, or may soon be, insolvent.
How is a company placed into liquidation?
The shareholders of a company can pass resolutions to wind up the company and appoint a particular Insolvency Practitioner (IP) as liquidator. This can normally be done in a swift and timely manner and can either be a members’ voluntary liquidation (for solvent companies) or creditors’ voluntary liquidation (for insolvent companies).
A creditor who is owed £750 or more can apply to Court to wind up a company. This is known as a winding up by the court.
What is the effect of liquidation?
Once a company is placed into liquidation, a liquidator is appointed to deal with the affairs of the company. A liquidator will be a qualified IP. The functions which a liquidator may perform include:
- Securing and realising the company’s assets.
- Conducting investigations into the company’s activities in the period leading up to the liquidation. This can be in relation to the director's conduct, or potential rights of action available to the company to recover funds for benefit of creditors.
- Reviewing the financial position of the company at various points in time in order to ascertain whether the company has been trading whilst insolvent.
- Providing reports to creditors regarding the liquidator’s actions since appointment, the outcome of any investigations and dividend prospects.
- Acting in the best interests of creditors and other stakeholders at all times.
- Distributing the company’s property amongst creditors in order of priority.
What is the cost of putting a company into liquidation?
It is unlikely that there will be any up-front costs to the shareholders or directors to appoint a liquidator to the company if the company has sufficient available assets with which to apply towards the costs of the liquidation.
If a company has little or no assets, then a liquidator will generally seek that funds be made available to pay his or her costs of acting as liquidator of the company. This can usually be done by way of an up-front payment or a personal guarantee from a director or shareholder. The level of fee will depend upon the circumstances of the case but can be discussed at the free of charge initial meeting.
Can I re-use a company name after liquidation?
Section 216 of The Insolvency Act 1986 places restrictions on the re-use of a name (or similar name) that has been used by a company that has entered into insolvent liquidation. Further information regarding these restrictions can be found in the document titled “Re-use of a company name after liquidation” section published by The Insolvency Service at this link. We always recommend that independent legal advice is sought regarding this area of law.
What are the benefits of appointing a liquidator to a company?
Appointing a liquidator to a company has a number of benefits, including:
- It results in an independent person being appointed to conduct an orderly winding up of the company’s affairs (including dealing with the company's creditors).
- It may prevent or reduce the company’s directors’ potential liability for insolvent trading.
- It may prevent or reduce the company’s directors’ potential liability for certain offences under the Insolvency Act 1986.
- It avoids the company being wound up by the court on the application of a creditor.
What are the responsibilities of a director of a company that has entered into liquidation?
The director of a company that has entered into liquidation has the responsibility of complying with the liquidator’s requests at all times. The failure of a director to comply with the liquidator’s requests may cause him to breach the requirements of the Insolvency Act 1986.
What is wrongful trading?
A liquidator can bring a claim against a director of a company for wrongful trading which many result in personal liability for the company’s debts from the time they should have reasonably concluded that the company could not avoid insolvent liquidation (but continued to trade anyway).
What is a HMRC Personal Liability Notice?
HM Revenue and Customs have the power to issue a notice to company director pursuant to Section 121C of the Social Security Administration Act 1992. This has the effect of the director becoming personally liable for certain company taxation liabilities. Further information regarding Personal Liability Notices can be found here.
If a company is placed in liquidation, is the director excluded from managing other companies?
A director is not automatically disqualified from managing other companies, however, a liquidator is obliged to submit a report to the Insolvency Service regarding the director’s conduct. If it has been found that there has been misconduct by the directors then disqualification may be appropriate.
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