FAQ – Liquidations by Directors

FREQUENTLY ASKED QUESTIONS – LIQUIDATIONS BY DIRECTORS

1. My Company is in financial difficulties, what are my obligations?

Where a Company cannot meet its debts as and when they fall due [for example, when it cannot pay its bills on time, or it is having County Court Judgments entered against it], it is regarded as insolvent. The Directors need to take action. It may be possible to re-finance the Company or put forward an informal or formal arrangement [a Company Voluntary Arrangement "CVA"] to its creditors. If however, none of these are feasible, then the Directors must take steps to cease trading and stop incurring any further credit. All Directors have an obligation to make sure that the position does not deteriorate further. Once a Company is insolvent, the Directors’ primary duty is to protect the interest of creditors – not the Directors or Shareholders.

2. Can the Company continue to trade up until the date of the meeting of creditors?

In most cases, once the decision has been made to put the Company into Liquidation, the Directors should cease trading. There are exceptions. In some instances, where there are contracts to finish off, or it will aid the collection of book debts, the business may continue. However, Directors have to be very careful to make sure that no further credit is taken. They should seek advice from a Licensed Insolvency Practitioner.

3. Who is in control of the Company once a meeting of creditors has been called?

The Directors retain control of the business until a Liquidator is appointed.

4. Will the Directors be allowed to buy the business or assets of the Company from the Liquidator?

The Liquidator is under a duty to obtain the best price that he can for the assets of the Company. He will usually obtain a valuation of these from a professional valuer. If the Directors’ offer is the best offer he receives, then the assets can usually be sold to the Directors.

5. Are the Directors liable for the debts of the Company?

No. The Company is a separate legal entity and contracts with people or Companies in its own right. Unless a Director has acted outside of his authority, or has given personal guarantees, that Director will not as a rule be liable for the debts of the Company.

6. Will I still be allowed to be a Company Director?

Even if a Company goes into Liquidation you can continue to be a Company Director unless you are subsequently disqualified or are made Bankrupt.

7. Is there any way in which I can become personally liable for monies to the Company or its Liquidator?

Yes. If you as a Director have acted outside your powers or contrary to the Insolvency Act or the Companies Act, you can become personally liable for the increase in the amount of debts owed by the Company from the time a Court decides the Company should have ceased trading, to the time when they actually did cease to trade. This is called ‘Wrongful Trading.’ It is for this reason that we always stress to Directors that once a Company is insolvent, with little or no prospect of recovery, it should stop taking any further credit immediately.

8. The Company owes H. M. Revenue & Customs substantial sums. Can they come after me for that?

H. M. Revenue & Customs (“HMRC”) have the power under the Social Security Act 1998 to issue a Personal Liability Notice against any officer of the Company for any unpaid National Insurance contributions. There must be neglect to pay or fraud on the part of the Company’s officers. HMRC can pursue individual employees for unpaid PAYE where the employee concerned knew that the employer had not deducted tax.  This will not happen if the deductions were made, but the Company failed to pay them to HMRC.

Directors and their advisors need to be very careful to ensure adequate wage records are kept.

9. Who can put a Company into liquidation?

The most common form of Liquidation is a Creditors’ Voluntary Liquidation, which applies when a Company is insolvent. This is instigated by the Directors calling a meeting of the Company’s Shareholders and its creditors. Lines Henry will assist you in the calling of these meetings.

10. What happens if the Directors or Shareholders cannot agree to put the Company into Liquidation?

As far as the Directors are concerned, once they are aware that the Company is insolvent, they are obliged to act in the best interests of the creditors. If they cannot agree as to whether or not the Company should be placed into Liquidation, they run the risk of incurring personal liability for the increase in the level of debts. This liability will run from the time when a Court decides they ought to have taken steps to put the Company into Liquidation, to the date they actually put the Company into Liquidation.

As far as the Shareholders are concerned, there must be in excess of 75% of those shareholders present [in person or by proxy] at the General Meeting who resolve to place the Company into Liquidation. If this cannot be agreed, it is possible for the Company to go into Compulsory Liquidation, by a creditor presenting a winding-up petition against the Company.

11. Who is Chairman at the meeting of creditors?

A Director is nominated as the Chairman and must attend the meeting. It is customary for the Chairman to allow a Liquidator from Lines Henry to deal with the running of the meeting.

12. What happens at the meeting of creditors?

A Directors’ report will be prepared, with the assistance of Lines Henry, which is presented to the creditors at the meeting. This contains details of the background to the Company, the reasons for its failure and statutory and financial information. Creditors will then have the opportunity of asking the Director questions about the running of the Company.

13. What happens after a Liquidator is appointed?

The Directors’ powers to control the Company cease. The Liquidator is now in charge of the Company and its assets.

14. What are the Liquidator’s functions?

The Liquidator’s primary functions are to protect and realise the assets of the Company for the benefit of the creditors. The Liquidator is also obliged to submit a ‘D Report’ on the conduct of the Directors, to the Department of Trade and Industry ['DTI'].

15. What is a D Report?

Under insolvency legislation, all Liquidators are obliged to prepare a report on anyone who has been a Director, or Shadow Director, of the Company within the three years prior to its Liquidation. The Insolvency Service can prosecute Drectors, seeking a Disqualification Order from the Courts, for up to 15 years, for those Directors whose conduct warrants it.

16. Who does the Liquidator act for once appointed?

The Liquidator acts for the creditors as a whole and has certain statutory obligations which he must fulfil.

17. What are the Directors responsibilities to the Liquidator?

The Director must co-operate with the Liquidator and hand over the assets of the Company and provide him with information. They must also attend the Liquidators’ offices, as and when reasonably required.

18. What happens to employees wages that are unpaid at the time of the Liquidation?

There is a Government scheme which ensures that certain payments, based on statutory maximum figures, can be paid to employees by the Redundancy Payments Service. These include unpaid wages in the four months prior to the commencement of the Liquidation, statutory notice, redundancy pay and unpaid holiday pay.  Employees will be required to complete form RP1 which will be submitted by Lines Henry on their behalf for assessment to the Redundancy Payments Service.

19. Will a Director also be able to claim unpaid wages and other benefits from the government scheme?

Directors are entitled to claim these sums, if they were employees of the Company. In some instances, where a Director is also the controlling Shareholder, his claims may be challenged by the Insolvency Service.  Independent advice is available if required.

20. How do employees or Directors make these claims to the government?

Once appointed the Liquidator will send the necessary forms to all employees concerned. When these have been returned to the Liquidatorss office, they will be forwarded on to the Redundancy Payments Service. Claims usually take about six to eight weeks to be processed.  Forms cannot be sent for assessment until the Company has been formally placed into Liquidation.

21. Will my Company’s Liquidation affect my credit rating?

Not directly. Clearly, if you lose your main source of income and stop paying credit cards etc on time, that will have an effect.

22. The Company borrowed money from one of my relations. Can I repay this before the Liquidation commences?

No. If you do it will be a preference to that creditor and the Liquidator will seek to overturn the transaction and obtain repayment of the monies through the Courts, if necessary.

23. My vehicles are on finance through the Company. What will happen to them?

Normally if you wish to keep the vehicle the finance company concerned may be prepared to transfer the lease/hire purchase agreement to you. If there is any equity in the vehicle you will need to account to the Liquidator for the value. You will need to act promptly as once the Company misses a payment the finance company will look to repossess.

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