If your company is insolvent and you’re wondering what will happen to you as a director, this page explains your role in the process, including what’s expected of you and things that should be avoided. If you’re worried about your company’s financial situation or you’d like to discuss your role as a director in more detail, contact us today for a confidential discussion.
What happens to a director of a company in liquidation?
As a director, you have a fiduciary duty to act in the best interests of your company and its members. But when a company enters into insolvent liquidation, the role of a company director changes very quickly, and you must prioritise the interests of creditors instead.
Directors hand over control to a licensed insolvency practitioner (IP), whose job throughout the process is to act in the best interests of creditors rather than shareholders. Directors are still involved in the process, though, as they will need to cooperate with the liquidator, hand over records and assets, and answer their questions as part of the investigation.
Most directors who have acted responsibly will be free to move on after the liquidation. However, if the liquidator finds evidence of misconduct, for example, the director continued to trade knowing the company was insolvent, they could be held personally liable for the debts and made to contribute to the assets from their personal funds.
What is insolvent liquidation?
A company is insolvent when it can’t pay its debts, and insolvent liquidation is the formal process of closing that company down, selling off assets, paying creditors where possible, and dissolving the business.
There are two main routes for an insolvent liquidation:
Creditors’ Voluntary Liquidation (CVL) – Where directors voluntarily liquidate an insolvent business.
Compulsory Liquidation – A court orders the liquidation because a creditor (usually HMRC) has filed a winding-up petition because they’re owed money from the company.
As soon as your business begins to struggle financially, you should speak to your accountant or an insolvency expert for advice. Being forced into a compulsory liquidation limits directors’ options and may subject them to stricter regulatory scrutiny.
What are directors’ duties when a company becomes insolvent?
Directors’ duties in insolvency are defined by both common law and statute. Once your company is insolvent, your duty as a director is to cooperate with the liquidator and act in the best interests of creditors.
That means:
- Stopping any activity that risks increasing creditor losses
- Not taking on new credit or debt you can’t repay
- Not favouring one creditor over others
- Keeping proper records of decisions made
These duties apply as soon as the company becomes insolvent to avoid the risk of personal liability.
Compulsory liquidation and directors
What is compulsory liquidation?
Compulsory liquidation is a court-ordered process that begins when a creditor owed £750 or more has served a statutory demand that has gone unsatisfied for 21 days, allowing them to present a winding-up petition to the court.
The main difference between compulsory liquidation and a CVL is that directors don’t voluntarily enter into the process. In a CVL, directors retain some control, and they can nominate their own insolvency practitioner and act proactively to protect creditors. In compulsory liquidation, that control is lost entirely. The Official Receiver is appointed by the court, and directors have no say in who investigates the company’s affairs.
In both situations, whilst the office-holder has a statutory duty to investigate directors’ conduct, the process in a compulsory liquidation tends to be more formal and adversarial. Taking early voluntary action through a CVL is generally viewed more favourably than being forced into compulsory liquidation by a creditor.
What happens to directors in compulsory liquidation?
During a compulsory liquidation, the Official Receiver will investigate the company’s affairs and the director’s conduct. The relevant look-back periods depend on what is being investigated, for example, two years for transactions at undervalue and six months for preferences under the Insolvency Act 1986, with wrongful trading potentially going back further.
Directors could face a higher risk of disqualification in compulsory liquidation, especially where the Official Receiver’s investigation uncovers evidence of misconduct. Personal liability is also more likely to be pursued where wrongdoing is found.
Directors who are forced into compulsory liquidation rather than taking early voluntary action may also be viewed less favourably by the Insolvency Service, as it can suggest that steps to protect creditors were not taken promptly enough.
What are the directors’ responsibilities during liquidation?
Once a liquidator is appointed, directors’ powers cease and control passes to the liquidator. Directors do, however, retain certain statutory obligations, which include:
Handing over company records and assets
Once a liquidator is appointed, directors’ powers cease and control passes to the liquidator. Directors do, however, retain certain statutory obligations, and the fiduciary duty of directors to act in the best interests of creditors remains throughout. Those obligations include:
- Financial records
- Bank statements
- Contracts
- Asset lists
- Company equipment
- Anything else belonging to the business
The liquidator will assess the liquidation value of assets to determine what can be realised for creditors. Any attempt to conceal or remove assets at this stage is an offence under the Insolvency Act 1986. This includes selling assets without the liquidator’s involvement. If assets were sold below market value, the liquidator can apply to have those transactions reversed.
Cooperating with the liquidator’s investigation
The liquidator is legally required to investigate how the company was run and report to the Insolvency Service. They’ll look at the company’s finances, directors’ decisions made in the lead-up to insolvency, and whether there’s been any director misconduct.
Directors need to ensure they fully cooperate throughout the liquidation, as obstructing or delaying the investigation could result in additional sanctions beyond any findings from it.
Responsibility to creditors
Liquidation creditor priority is set by statute and cannot be altered by directors. Creditors are paid in a set order prescribed by the Insolvency Act 1986 once assets are realised:
- Fixed charge holders
- Liquidation expenses (including the liquidator’s fees and costs)
- Ordinary preferential creditors (including employees owed wages up to £800, holiday pay, and pension contributions)
- Secondary preferential creditors (HMRC VAT, PAYE, and NIC, for insolvencies from 1 December 2020)
- Floating charge holders (after the prescribed part is set aside for unsecured creditors)
- Unsecured creditors
- Shareholders
Directors can’t interfere with that order, and any attempt to favour one creditor over another or to divert funds to themselves may constitute a preference under the Insolvency Act 1986 and will be investigated by the liquidator.
What can’t a director do when a company is insolvent?
Once a company is insolvent, directors must avoid any actions that could worsen the position of creditors or increase losses.
Directors’ conduct before and during the liquidation is closely assessed by the liquidator, and they’ll look at whether they’ve been involved in: wrongful trading, misfeasance, fraudulent trading, giving preferential treatment to certain creditors, and selling or transferring company assets below market value.
Where any of these claims are established, directors can face personal liability, disqualification, or both.
What is wrongful trading?
Wrongful trading occurs when a director allows the company to continue trading and take on debt, knowing it is insolvent. If a liquidator finds evidence of wrongful trading, a court can
to make a personal contribution to the company’s assets, increasing the funds available for distribution to creditors.
A director needs to show they did everything they reasonably could to minimise losses for creditors once it was clear the company was insolvent. Taking early professional advice and acting promptly is the best way to demonstrate this, as delaying can be treated as evidence of wrongful trading.
What is fraudulent trading?
Fraudulent trading is more serious than wrongful trading, as it involves deliberately defrauding creditors, for example, taking on credit with no intention of repaying it, or misrepresenting the company’s financial position to suppliers or lenders. Unlike wrongful trading, fraudulent trading can apply to anyone knowingly involved, not just directors. It carries both civil liability under s.213 of the Insolvency Act 1986 and criminal liability under s.993 of the Companies Act 2006, with those convicted facing unlimited fines and up to 10 years’ imprisonment.
What are preference payments?
A preference payment is when a director pays one creditor ahead of others in the period before insolvency, for example, repaying a loan from a connected party such as a family member or fellow director or where there is a Personal Guarantee, giving that creditor an advantage they would not otherwise have received.
For a payment to constitute a preference under s.239 of the Insolvency Act 1986, the director must have been influenced by a desire to put that creditor in a better position.
Courts can reverse preference payments made within six months of insolvency, or within two years where the recipient is a connected party.
The best way to avoid making preference payments in insolvency is to take professional advice before making any payments to creditors once the company is struggling financially.
Selling company assets before liquidation
If you sell company assets before liquidation, the liquidator will review those transactions as part of their investigation into the company’s affairs.
If assets are sold for free or at less than their market value, the liquidator can challenge those sales as transactions at an undervalue under s.238 of the Insolvency Act 1986. To be challengeable, the transaction must have taken place within two years of the company entering insolvency, and the company must have been insolvent at the time or have become insolvent as a result. Where those conditions are met, the liquidator can apply to the court to have the transaction reversed.
Directors should be aware that investigating such transactions is a statutory duty; the liquidator is required to act in the best interests of creditors. If you sold assets before liquidation and are unsure whether those transactions could be challenged, it is worth taking advice before the process begins.
Can a director be disqualified after liquidation?
In some cases, a director could be subject to disqualification proceedings after liquidation. The liquidator is required to submit a conduct report to the Insolvency Service on every director of an insolvent company within the first 3 months from the start of the liquidation. If the Insolvency Service believes a director’s conduct makes them unfit to manage a company, it can apply for a disqualification order under the Company Directors Disqualification Act 1986 within 3 years of the date of liquidation.
Disqualification periods range from two to fifteen years, and during that time you cannot act as a director, be involved in the formation of a company, or take part in any management role without court permission.
Conduct that may lead to director disqualification includes:
- Making preferential payments
- Transactions at undervalue
- Wrongful or fraudulent trading
- Failure to keep proper accounting records
- Failure to cooperate with the liquidator
- Material omissions in the preparation of the Statement of Affairs
- Continuing to trade to the detriment of creditors
Can I be a director of a company after liquidation?
If you haven’t been disqualified, you can set up or run another company after liquidation. If you are disqualified, acting as a director during that period is a criminal offence, and you can also be held personally liable for the debts of any company you manage while disqualified.
How the Liquidation Centre can help directors through liquidation
Our licensed insolvency practitioners deal with director situations like this every day. Our insolvency experts will clearly walk you through your options, your obligations, and the likely outcomes for your situation.
If it’s decided that a CVL is the right route, we can guide you through it from start to finish. If you’re facing compulsory liquidation or an investigation, we can explain what to expect and help you respond appropriately.
Some directors also seek advice from a directors’ duties insolvency solicitor, our team can work alongside your legal advisers or act as your first point of contact.
If you’d like a free, confidential conversation, contact us today to talk through your options.
Director duties in liquidation FAQs
What is compulsory liquidation and how does it affect directors? ▸
Compulsory liquidation is court-ordered, usually following an unpaid creditor petition. For directors, it means an immediate loss of control and an automatic investigation by the Official Receiver into the company’s affairs and directors’ conduct. As soon as a company becomes insolvent or there are signs of insolvency, directors should seek advice promptly. Acting early and entering a CVL where appropriate gives directors more control over the process and demonstrates to creditors that steps were taken to minimise losses.
Can a director of a liquidated company get a mortgage? ▸
Liquidation itself doesn’t appear on your credit file in the way personal insolvency does, as a company is a separate legal entity. However, if you’ve given personal guarantees that weren’t met, or if you’ve been declared bankrupt separately, that will affect your ability to get a mortgage. Lenders may also ask about previous directorships as part of their assessment. If you’re unsure, it’s best to speak to a mortgage broker who deals with complex cases.
What happens to directors when a company goes into administration? ▸
Administration is a different process from liquidation, and the aim is to rescue or restructure the business if possible, rather than close it. Directors lose day-to-day control while the administrator runs the company, but they aren’t automatically investigated in the same way as in liquidation. If administration results in a pre-pack sale or liquidation, the normal director investigations will take place.
What happens to directors when a company is struck off? ▸
Striking off a company through Companies House is not a formal insolvency process. However, if a company is struck off with outstanding debts, creditors can apply to have it re-added to the register, and normal insolvency rules may then apply. Directors who used strike-off to avoid paying creditors can face the same consequences as if the company had gone through a formal liquidation.
What happens to a director of a company in liquidation? ▸
Directors lose control of the company when the liquidator is appointed. From that point, the liquidator makes decisions regarding assets, creditors, and the winding up of the business. You’re required to cooperate fully, hand over records and assets, and answer the liquidator’s questions honestly. If there are concerns about conduct, the liquidator will report these to the Insolvency Service.