liquidation and the effect on company directors

Effect on a Director Of An Insolvent Company

Effect on a Director Of An Insolvent Company? Written by John A Waller, Director. Reviewed June 27th, 2024.

As a director, it is important to be aware of your business’s current financial position and act in the company’s best interests. So, even if you have financial difficulties in your business, seeking help from qualified professionals specialising in insolvency can be awkward. However, it is common for company directors to fight when insolvent. Pride and even fear take control of their decisions. However, the sooner you profit from robust advice, the better your business chances of remaining viable.

As a limited company director, you must ensure you avoid wrongful trading. Your company must cease trading as soon as you know it may be insolvent. Failure to do so leaves you and other directors exposed to allegations of wrongdoing when the company liquidates.

We may remove any uncertainty. We briefly outline the insolvency process and its potential implications for you as a company director and whether you are at risk of any personal liability.

As soon as you have decided to seek advice from an insolvency practitioner, you should note everything said.

However, you still hold the director’s office until a licensed IP is appointed.

So I need to close my limited company. What next.

Once the licensed insolvency practitioner assumes an appointment in any liquidation, your occupancy as company director ends. The company ceases trading (unless a trading company administration).

As part of the Liquidator’s process and the duties of an IP, the IP will investigate the direct or conduct before their appointment.

Please read the liquidation of an insolvent company for further detailed guidance.

What if the actions of a director cause a company to become insolvent?

Directors’ duties and responsibilities become relevant if their acts or judgments directly contribute to the company’s demise into insolvency.

Company directors remain accountable for their actions until their resignation if they breach a duty when a director.

Transaction at an undervalue of a company asset

A transaction at undervalue happens when a company’s assets are realised for less than their actual value. However, this can be traced back to two years if a limited company enters liquidation. 

Director issues with HMRC

While acting as a company director. It is vital to understand your obligations toward HMRC.

HMRC is now ranked as a preferential creditor, so directors need to tread carefully owing them money.

HNRC is usually an unsecured creditor and will strive to collect an outstanding tax debt.

For further reading, please view ‘HMRC Tax debt problem‘.

Affect on a Director Of An Insolvent Company – Wrongful Trading of a Limited Company.

The director continued to trade and, therefore, incurred more debt after they knew or knew the company was insolvent.

Unfair preference of a company creditor

A company takes specific measures that put a creditor in a more advantageous position in the distribution of assets during liquidation. However, the company’s directors must have intentionally carried out such actions.

Bounce Back Loans and liquidation.

Many company directors remain concerned about seeking any form of business rescue and the impact of liquidating a company with a bounce back loan.

The third lockdown implication severely affected many UK companies and has not been part of the bounce back loan.

If your limited company fails due to the third lockdown, directors must seek early advice to remove worries and protect your company’s creditors.

For further reading, please click on Liquidation and Bounce Back Loans.

What Happens To A Director of An Insolvent Company –

Does Insolvency affect you?

Various types of corporate insolvency exist. Limited company status places a legal fence between your personal and company finances. Limited Liability protects directors financially, provided they have acted correctly. So, a company usually does not affect their failure. So, the company liability provided operates correctly, and no guarantees do not affect your assets.

Insolvency usually involves your business ceasing trading through liquidation or selling through an administration. If you are a sole trader or partnership, you may go bankrupt and lose your assets, including your home. The effects of Insolvency will have a different impact on each company, so speak to an Insolvency Practitioner before moving forward.

Insolvency Practitioners Report on Directors Conduct.

IMPORTANT! No matter what, insolvency sales staff promises you upfront. Insolvency Practitioners are legally required to investigate the conduct of the company’s directors before their appointment. This applies to both liquidation and administration. The director’s conduct report is confidential and submitted to the Insolvency Service online for review and possible action. The insolvency services may take action and consider a director’s ban for up to 15 years, though such a term is rare.

Directors should note that allowing your company to be closed through compulsory liquidation ensures further censure by the official receiver and possibly being held personally liable for company debt.

What Happens When A Personal Guarantee Exists?

A personal guarantee presents facts in a more complicated stance. Guarantees, however, breach the corporate veil. When a company director signs a personal guarantee, like a business loan, the guarantee holder can use the asset as security. For further reading, click on ‘Dealing with Personal Guarantee Issues‘.

Can Directors Claim Redundancy?


However, the company must have employed a director for over two years and was part of the PAYE scheme. The government can redundancy the director. You may then also claim:

  • Holiday pay;
  • Unpaid wages and
  • Other statutory entitlements.

How much tax will I pay on my redundancy?

If you are made redundant by an insolvent company, the redundancy money you receive remains tax-free, up to £30,000. Other than redundancy, cash received includes payment, notice, or holiday pay, which remains taxed.

Overdrawn Director’s Loan Account.- How is it Affected When a Company is Insolvent?

Upon the liquidator’s appointment, his responsibility is to liquidate and maximise the company’s assets. If the liquidators know that the directors owe money to the company, then the overdrawn directors’ loan account must be paid back.

Nothing can prevent you from holding a directorship again if you have no complaints or dismissal orders.

If my limited company goes bust, will I lose my house?

While it’s unlikely, the potential risk of losing a home in business liquidation is a serious matter that business owners should be aware of. The potential severity of this issue underscores the urgency and importance of understanding the factors that could lead to it.

These factors include

  1. personal guarantees,
  2. director’s loan accounts, and
  3. wrongful trading

Any of the above can play a significant role in losing a home.

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Affect on a Director Of An Insolvent Company



Affect on a Director Of An Insolvent Company
Affect on a Director Of An Insolvent Company
Affect on a Director Of An Insolvent Company
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