John A Waller
Reviewed 24th March, 2021.
What Happens To A Director of An Insolvent Company?
What Happens To A Director of An Insolvent Company, Once in Liquidation?
Insolvency remains a daunting arena to enter. Many directors hold back seeking advice on the matter, not realising they may be trading insolvent and establishing their position worse as a director. They fear what happens to a director of an insolvent company without understanding the procedure.
We may remove any uncertainty. We briefly outline what the process involves in insolvency and potential implications for you as a director.
Then, once you have decided to seek an Insolvency Practitioner’s advice, ensure you note everything said.
However, moving forward, you still hold the office of a director until a licensed IP is appointed.
Once the insolvency practitioner assumes an appointment, in any liquidation, your occupancy as company director ends. The company ceases trading (unless a trading administration).
As part of the Liquidators duties, the IP will then investigate the direct or conduct before their appointment.
Please read How to I Liquidate My Company for further detail.
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. This can be traced back to up to two years in the event of a limited company entering liquidation.
Wrongful Trading of a limited company
The director continued to trade and incurred more debt after they knew or knew that the company was insolvent.
Unfair Preference of a company creditor
A company operates specific measures that place a creditor in a more favourable position on distribution of assets during a winding up. However, directors of the company must have carried out such actions intentionally.
Many directors are concerned about the implications of liquidating a company with a bounce-back loan.
The second lockdown implications have had severe implications on many UK companies and have not formed part of the bounce-back loan.
If your limited company is now failing due to the second lockdown, directors must seek early advice removing worry while protecting your company’s creditors.
For further reading, please click on Liquidation and Bounce Back Loans.
Does Insolvency Have an Effect on You?
Limited company status places a legal fence between your personal and company finances. Limited Liability protects directors financially providing they have acted correctly. So they are usually not affected by a company failing. So the company liability provided operates correctly, and no guarantees offered, does not affect your assets.
Insolvency usually involves your business ceasing trading through liquidation or sold through an administration. If you are a sole trader or partnership, you may go bankrupt and lose your personal assets including your home. The effects of insolvency will have a different effect on each company, so, therefore, speak to an Insolvency Practitioner before moving forward.
Insolvency Practitioners report on Directors Conduct.
No matter what the sales staff promises you upfront. Insolvency Practitioners are legally required to investigate the conduct of the directors of the company before their appointment. This applies to both a Liquidation and an Administration. The report is confidential and is submitted to the Insolvency Service online for review and possible action. The insolvency services may then decide to take action and may consider a director’s ban for up to 15 years, though such a term is indeed rare.
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 for like a business loan, this means the holder of the guarantee can use the asset as security. For further reading click on ‘Dealing with Personal Guarantee Issues‘
Can Directors Claim Redundancy?
Employing a director for more than two years, and PAYE paid, director’s redundancy is available from the government. You may also claim holiday pay, unpaid wages and other statutory entitlements.
How much tax will I pay on my Redundancy?
When you are made redundant from an insolvent company, redundancy money you receive remains tax-free up to £30,000. However, money received other than redundancy includes payment, lieu of notice or holiday pay remains taxed.
Overdrawn Director’s Loan Account.- How is it Affected When Company Insolvent?
Upon the liquidator’s appointment, then their responsibility signifies they will liquidate and maximise the company creditors’ assets. If the liquidators know, the directors owe money to the company? Then the overdrawn directors loan account, therefore, requires paying back.
If, however, you have no complaints or disqualification order, there, therefore, remains nothing to prevent you from, then, holding a Directorship again.