As the director of a company, it is important that you are aware of and properly execute your responsibilities. This is never more so than when your company is preparing to enter insolvency, is in the middle of insolvency proceedings, or has just finished the insolvency process.
Director’s duties before liquidation
A director has the duty to determine if their company is insolvent. Your business being Insolvent means you will not be able to pay your debts when they are due.
In order to determine if your company is insolvent, you can carry out the ‘cash-flow’, ‘balance sheet’ and ‘legal action’ tests. These are briefly:
- Cash Flow Test – Scan the company pay its debts when they fall due?
- Balance Sheet Test – Are the company’s liabilities greater than its assets?
- Legal Action Test – Has a creditor obtained a Country Court Judgement (CCJ) against the company?
These are set out in greater detail within our guide on insolvency. If you suspect your company may be insolvent you have a duty to find out if it is. The failure of any of these tests could mean your company is insolvent.
If you discover that your business is in fact insolvent you have a duty to act so as to not make the position of your creditors any worse. At this point, you must cease trading as soon as practically possible and seek professional advice.
Directors may be tempted to accrue additional debt with no intention of paying it back in an attempt to avoid the issues at hand. This however risks an action of wrongful trading that can lead to them being disqualified and potentially holding personal liability for the company’s debts.
Similar wrongful trading includes actions like selling off company assets at a lower price than market value, which can be subsequently undone by the liquidator anyway, or presuming that money invested by the director belongs to them rather than the company. During liquidation, the director may be paid out their investment but only if there is sufficient funding to cover the creditors ahead of them in the queue.
If the company cannot continue in its present form you need to seek professional help. Whether that is to wind up the company or arrange a plan to clear company debts. Either way, you have a duty to act as a director.
Director’s duties during liquidation
Once you have determined that your company is insolvent you should approach a licensed Insolvency Practitioner for advice going forward. If they deem that the best option for your company to liquidate that process will begin.
free consultation and professional advice with no commitment required until you proceed on a course of action. If one of our expert team recommends liquidation, they will guide you the rest of the way.
You as a director will have to call a meeting of the Board of Directors who will need to approve the appointment of an Insolvency Practitioner. If you are the only director in the company, you alone can make this decision, but if not, then 75% of the board have to agree to take this action. Once the board have decided that insolvency is the best way forward your dedicated Insolvency Practitioner will take over the process.
You will be required to assist the Insolvency Practitioner in preparing a Statement of Affairs outlining the company’s current financial situation. This must cover information from full details on debts and creditors, to asset valuations and recent balance sheets. All of which is designed to give the Company’s creditors a solid overview of the state of the company.
From here you must cooperate fully with the Insolvency Practitioner’s investigation. If you do not, they can request that a court compels you to do so and seize the required documentation. You will also be interviewed by your Insolvency Practitioner during the course of their investigation.
Director’s obligations after liquidation
Once the company is liquidated it will be struck from the registrar of companies at Companies House.
It is important to note though, that as of 2021 the Insolvency Services have the power to investigate Insolvent companies for Fraudulent trading. The change was brought into effect to prevent directors from liquidating their companies to avoid repaying Covid-19 loans.
For expert advice and guidance on the liquidation process from the perspective of a director contact Focus insolvency for a free consultation.