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What Happens to a Director during Liquidation?
Having a winding up order issued against your company is very serious, and should be avoided wherever possible. However, if you do find yourself in the position where a winding up order has been issued to a company of which you are a director, it’s likely that you’ll have questions about what happens next.. This article will explore the impact of liquidation for directors, beginning with the issuing of a winding up order.
What is a Winding Up Order?
A winding up order is an order issued by the courts determining that an insolvent company should be wound up and liquidated. The courts will issue a winding up order after an unpaid creditor of the company being wound up has successfully brought a winding up petition against that company for the unpaid debts.
What Happens Next for Company Directors?
Firstly, the courts appoint an Official Receiver. The Official Receiver is in charge of the liquidation process. As soon as the Official Receiver is appointed, the directors effectively lose their decision-making powers, though they will be required to co-operate with the Official Receiver to provide all the information necessary and facilitate the liquidation process. As a director, you should co-operate to the fullest extent with the Official Receiver.
The Official Receiver will start their investigations into the company immediately in order to assess the current position. They must make a statement within 12 weeks of their appointment whether they intend to act as the company’s liquidator or appoint a separate liquidator.
After the Official Receiver has made their decision, the liquidation will continue along the normal lines. In brief, this process will see the liquidator, the Official Receiver or both going through the process of realising the company’s assets and distributing the proceeds to creditors.
Official Receiver’s Investigation Into Directors’ Conduct
As part of the compulsory liquidation process, the Official Receiver has to investigate the actions of the company’s directors prior to the winding-up order. Each director must attend a two hour interview with the Official Receiver where they will be asked to provide a statement of affairs of the company and discuss the events leading up to the company’s insolvency.
As a director, it is very important that you prepare thoroughly for this interview. You will need to have all relevant information, including accounts and statements ready to submit to the Official Receiver.
The Official Receiver can also require a director to attend court for examination. This is very unusual and only used in situations where it’s suspected there has been severe misconduct on the part of the director.
There are three specific things that an Official Receiver will be looking out for as part of their investigation:
Wrongful Trading: Where the director continued to trade and incurred more debts after they knew or ought to have known that the company was insolvent.
Transaction at an Undervalue: Where a company sold any of its assets for an undervalue for a period of up to two years prior to the company’s liquidation.
Unfair Preference: Where a company takes certain actions that puts a creditor in a better position than they would otherwise have been on a distribution of assets during a winding up. These actions must have been intentional (though it is presumed they were if the creditor is a connected party to the company (i.e. a director of the company)).
Reporting to the Department of Department for Business, Energy & Industrial Strategy
Once they’ve conducted their investigation, the Official Receiver must then submit a report to the Department for Business, Energy & Industrial Strategy with recommendations about whether any sanctions need to be levied against the company’s director(s).
The sanctions for all three offences above can lead to the directors being disqualified from acting in the capacity of director for a period of up to 15 years. There are also particular rights of action that can be bestowed on the liquidator that may apply: for example any transaction at an undervalue can be reversed or the directors held personally liable for the amount of the undervalue.
Though this can all sound very worrying, these sanctions are reserved for situations where there has been director misconduct and are there to protect the creditors of the company. The sanctions are not applied lightly and will only be levied after a full investigation.
Proceeds from the Liquidation
As the company nears the final stages of liquidation, any proceeds realised from the company’s assets will be distributed to the company’s creditors.
Directors will not receive any proceeds from the company in their capacity as shareholders, as the company was insolvent. However, it may be that a director stands as a creditor to the company in some other capacity. Whether they will receive their returns on these debts very much depends on the monies realised by the liquidation process and where they stand in the pre-determined order of priority for creditors.
Closure of the Company
Once the distribution of proceeds is complete, the Official Receiver will chair a meeting of the creditors where they will issue a final report. They will also be released from their duties and the company will be fully wound up.
If you are being threatened with a winding up petition, you should speak to someone who can discuss your options and put together a plan of action as quickly as possible. Call us on 020 8444 2000 or use our Contact Us form.
Written by: Simon Renshaw