Why is DIY The Wrong Way To Liquidate Your Company? - The legalities aside, It's a huge risk to take...
Liquidation is one way to close down a business that is either in financial trouble or that has come to the end of its useful life. A Licensed Insolvency Practitioner has to conduct the liquidation. Once all the formalities have been dealt with and the assets sold and distributed, the company ceases to exist. But what happens after a company goes into liquidation and are there implications for the Directors?
Investigations After Liquidation
When a company goes into an insolvent liquidation, there is always an investigation into why. The liquidator is required to submit a report to the Insolvency Service on the conduct of all those who have acted as a director in the three years immediately preceding liquidation. The Insolvency Service then decides whether or not they wish to investigate the conduct of the director further.
Liquidators are required by statute to carry out an investigation and there are professional standards that set out the minimum amount of work that is required to be done. If anything is found that requires further clarification, the directors of the company will be asked to assist and are dutybound to cooperate.
What if Problems are found after liquidation?
If the investigation conducted by the liquidator uncovers anything of concern, they will refer to the directors of the company first and ask that they explain or provide further information about the circumstances or their conduct. Things which might require further explanation include;
- Continuing to trade when they knew (or ought to have known) that the company was insolvent and was not going to be able to trade out of its problems
- Building up debt knowing that could not be repaid
- Selling company assets below their true value
- Paying some creditors over others
- Using funds owed to HMRC to prop up the business
Being a company director is a position of responsibility and as long as the Directors can justify what they did or provide reasonable explanations, the matter is unlikely to go any further.
Making honest mistakes and bad decisions, even if they led directly to the downfall of the company, generally won’t lead to action taken against the director who made them, but being (or appearing to be) dishonest, or failing to cooperate with the liquidator can result in severe consequences.
What sanctions can be imposed after liquidation?
If a Director is found to have behaved improperly either before, during or after the liquidation, there are a number of sanctions which may be imposed.
Directors who are judged to have knowingly broken the rules can find themselves personally liable for company debts, they may be disqualified from acting as directors (or any other position of influence within a company) for between 2 and 15 years. They may also face prosecution, be subject to arrest and have to answer for their transgressions before a court.
If the liquidator spots suspicious transactions, particularly money being moved outside the company which doesn’t appear to be in the company’s interests (and without adequate explanation), they have the power to instruct Directors or recipients to repay the money.
What Else Do I Need to be Aware of After Liquidation?
If Directors have borrowed money from the company as a Directors loan, then the liquidators are obliged to recover this as well as any other money owed to the company being liquidated.
While most company debts are dealt with one way or another as part of a liquidation, it’s worth bearing in mind that if Directors have issued a personal guarantee against company borrowing, then they are still liable for the remainder of those debts, which will remain payable even after the company has been liquidated.
If the Directors are considering setting up a similar company, they will be unable to use the same (or similar) company name to do so unless they satisfy certain criteria.
If you’re concerned about the implications of your business being liquidated, contact us a free consultation and can advise what the best course of action is based on your individual circumstances.