Directors Responsibilities in Liquidation

It is crucial for directors to understand their duties, additional ones arise upon liquidation. Liquidations can be commenced voluntarily by a resolution passed by over 75% by value of  shareholders. Alternatively a winding up petition can be turned into a winding up order  by the court for a company to be put into compulsory liquidation.  The director’s additional duties during the liquidation process are described below.

1. Duty to Cooperate with the Liquidator: directors have a responsibility to provide any information and assistance requested by the liquidator to carry out his role. This includes giving him all the company’s book and records, access to any accounting programmes and data, access information for digital assets and to attend meetings as necessary. 
2. Duty to Act in the Best Interest of Creditors: the duty to act in the best interest of the company and its creditors is required of a director before and after liquidation. This includes not putting one creditor in a better position than another, not to worsen their exposure once the company becomes insolvent and to try to minimise any losses. 
3. Duty to Cease Trading: The directors of a company must stop trading if the company is insolvent and continuing to make losses and incurring additional liabilities. Under the guidance of an Insolvency Practitioner they might complete sales orders, contracts or projects if it does not increase losses further and enhances realisations for the creditors. 
4. Duty to Preserve Assets: The assets of the company must be protected by the directors for the benefit of all creditors once the decision to liquidate has been taken, until the liquidator is appointed. This includes protecting the company’s tangible assets, such as property, machinery and stock, as well as collecting debts. 
5. Duty to Submit Report: The directors, assisted by the nominated liquidator, have to prepare a report and statement of affairs, to be placed before the creditors at a meeting, which sets out the company’s history, trading information and current financial position. It should also detail any transactions undertaken that were not in the normal course of business in the preceding 12 months. Directors may have to answer direct questions from creditors about matters that are or are not in the report at a physical or virtual creditors meeting. 
6. Duty to Attend Meetings: Directors shall be present at all meetings of creditors and any such other meetings as the liquidator may request. Directors will be required to present information on the company’s affairs and respond to inquiries at these meetings. If the directors do not comply they can be compelled by court order or examined under oath in court. 
7. Duty to Notify Interested Parties: the directors will be assisted by the nominated liquidator to notify shareholders, employees, creditors, and any appropriate regulatory authorities of the company’s insolvency. This will include publishing statutory notices in the London Gazette, consulting with employees and their representatives as appropriate and other stakeholders. 

In conclusion, directors must be aware of their responsibilities and act appropriately to help facilitate an orderly conclusion to the life of the company. They can contribute to a smooth and effective liquidation process by working with the liquidator and acting in the best interests of creditors. This will help give them closure on a stressful situation and be better placed for the next chapter in their lives.

What is a director’s responsibility in liquidation?

In a liquidation, a director’s duty is to act in the company’s creditors’ best interests, not that of its shareholders or directors. They must work with the chosen liquidator and give them any pertinent information and paperwork. They must stop trading, assist as required in realising the company’s assets, and provide additional assistance and know how when requested.

What happens to directors when a company goes into liquidation?

When a company enters liquidation, the directors lose their executive decision making capacity but retain their obligations to the company and its creditors and to assist the liquidator. The liquidator takes control of the business and takes the executive decisions on asset realisations and other matters.

Is a director liable for liquidation?

A director may be personally liable for the liabilities taken on by the company, if they were incurred after the director ought to have concluded that the company had no reasonable prospect of settling them.  The liquidator has an obligation to review the financial records and conduct of the directors to ascertain if any actions were undertaken to the detriment of creditors which he can reverse by court order.

What powers do directors have in liquidation?

When a company is placed into liquidation, the directors lose their ability to make decisions on its behalf, this role is taken over by the liquidator. If the directors are also shareholders or creditors they retain the rights of those classes of stakeholder to hold the liquidator to account and participate on votes concerning his remuneration, amongst other matters. 

What obligations do the directors and officers have upon commencement of a liquidation?

The directors and officials are required to assist the liquidator and give them all pertinent information and paperwork. Thereafter the involvement of the directors usually falls away quite quickly. The liquidator will require them to complete a questionnaire which will form the basis of information that will need to be provided to the Government’s Insolvency Service under the provisions of the Company Director Disqualification Act.  They then undertake further considerations and investigations to help them decide whether the director is fit to continue to be a director or whether director disqualification is appropriate.

Are directors liable after winding up?

If directors acted inappropriately during their tenure prior to the liquidation they are at risk of legal actions from the liquidator and in some cases HMRC or other creditors to make good the position. Such actions could include wrongful or fraudulent trading, transactions at an undervalue, preferential payments, continuing to trade to the detriment of the crown or otherwise acting misfeasance.

What responsibilities do directors have when a company goes bust?

When a company becomes insolvent the directors have a duty to act in the creditors best interests. This will normally entail instructing an Insolvency Practitioner to assist them to call a meeting of the board which resolves to call meetings of shareholders and creditors to put the company into liquidation. Once in liquidation the directors have a duty to cooperate with and to assist the liquidator as requested.

What are my rights when a company goes into liquidation?

You have the right to take part in the liquidation process as a creditor or shareholder and to receive any dividend distribution of the company’s assets that arises. If you think the liquidator acted improperly, you will have rights to challenge their actions.

Who controls a company in liquidation?

In a liquidation, the liquidator is in charge of the company. They are in charge of any final trading decisions, selling its assets, and paying creditors from the proceeds; they are appointed by the court or the creditors.

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk