As a company director, there are many questions that may arise when you’re looking to liquidate your company, whether it’s in good financial health or not. Not least what happens to a director of a company in liquidation.
There are two types of voluntary liquidation: Creditors’ Voluntary Liquidation (CVL), which is for insolvent companies, and Members’ Voluntary Liquidation (MVL), for solvent companies. Your role in each of these is similar but there are some differences.
What happens to a director of a company in a Creditors’ Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation (CVL) is a process that’s suitable when a company is insolvent, meaning it can no longer pay its debts. It’s initiated by the directors on behalf of the company, in recognition that the business is unable to continue trading due to its financial position and that the best way to protect its creditors is to liquidate its assets.
Initially, the director’s pivotal role is to identify that the company cannot meet its financial obligations and to seek professional help from a licensed insolvency practitioner. The expert team at FA Simms will listen carefully and discuss all the potential options. The directors then decide on the best way forward for their particular business as there may be other alternatives to liquidation proposed by our team.
If voluntary liquidation is agreed on, a licensed insolvency practitioner is formally appointed to oversee the process and the management of the affairs of the business will be handed over to the insolvency practitioner. Their duties will include calling a meeting and proposing voluntary liquidation to the company’s shareholders and creditors, selling company assets, distributing the proceeds to creditors and ultimately dissolving the company.
A director’s legal obligations in a Creditors’ Voluntary Liquidation (CVL)
When your company enters liquidation, all the directors have several legal obligations they need to meet throughout the process. These include:
- Cooperating fully with the liquidator, providing documents and information about the company.
- Ensuring they don’t take any actions that might worsen the company’s financial situation, such as selling assets at undervalue or paying off particular creditors ahead of others (preferential payments).
- Refraining from making preferential payments to themselves or family members.
- The aspect of liquidation we find directors are most apprehensive about is the liquidator’s questions on the management of the business and the reasons for the financial difficulties.
Any signs of wrongful or fraudulent trading, or preferential treatment of creditors, will need investigating by the liquidators. This means that directors have run the business past the point when they realise creditors can not be paid (wrongful trading) and that they have not treated all creditors fairly (preferential payments).
These issues do not apply to every business, particularly those that have taken advice from a licensed insolvency practitioner as soon as an issue is identified.
What happens to a director of a company in a Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation is only possible when a solvent company’s directors decide to voluntarily wind up its affairs, often for reasons like retirement, a restructure or a company is no longer needed. Solvent means the company is able to pay everyone it owes money to in full. As the company is solvent there is no need for the liquidator to consider wrongful trading or preference payments.
You’ll still need to work with a licensed insolvency practitioner as an MVL is a legal process that only a qualified professional is allowed to oversee. It’s also helpful to have someone to guide you on your solvency status and the best way forward.
A director’s role in an MVL differs from a CVL. Before initiating an MVL, the directors must make a Declaration of Solvency, asserting that the company can pay everyone it owes money to within 12 months.
Once the MVL process begins, as with CVL, control of the company passes to the liquidator. They then distribute the assets among shareholders after repaying all the debts.
An MVL is often a tax driven process recommended by your accountant or tax advisor.
Getting help with what happens to a director of a company in liquidation
Ultimately, as a director your commitment to transparency, honesty and responsible decisions makes the liquidation process much easier for everyone involved.
It’s crucial that you consult a licensed insolvency practitioner to get appropriate advice and follow the necessary legal procedures, to protect both your company and your own interests during the liquidation process.