Directors protection during Compulsory Liquidation
When a company is liquidated or Wound up, the liquidator is required to write a report on the actions of the Directors of the company. If they believe the Directors did not act in accordance with their duties then they will indicate that they believe the Directors were guilty of wrongful trading. If this accusation is upheld, the directors in question can be made personally liable for the company’s debts. They may also be banned from being a director. How do you minimise this risk?
If you are a director of a company which is struggling and you feel that there is no possibility of turning the business around, you will need to formally close the company down. The legal term for this process is Liquidation. The Liquidation process will involve selling the assets of the company and distributing any proceeds to the company’s creditors. Any cash left over is returned to the shareholders. The company is then closed, any outstanding leases cancelled and remaining staff made redundant.
There are different types of liquidation and the one you require will depend on the status of the business you want to close. Should your business be in a position to repay all the people it owes money to, then you will be able to liquidate the company using the Members Voluntary Liquidation (MVL) process. The business is simply closed and all outstanding creditors paid. Any remaining assets or cash is then the property of the shareholders of the business to do with as they wish.
In the current economic climate it is unfortunately more likely the decision will be taken to liquidate a business because it is no longer a viable trading entity. The company may have run out of cash and owe more money to creditors than it cannot afford to pay. No further investment can be found and so the business is forced to stop trading. In these circumstances the directors can either of the following two options:
1) initiate a Creditors Voluntary Liquidation (CVL) themselves
2) leave the company dormant until it is forced into liquidation by one of its creditors (often the Inland Revenue) through a winding up order.
It should be noted that once a company is liquidated by either of these options, the liquidator will report on the conduct of the Directors in the period up until it stopped trading. If the liquidator believes that the directors did not act properly during this period (particularly in the area of minimising the creditors losses), then they can accuse the directors of wrongful trading. If this is upheld then directors could be banned from being a director in any new or existing business, and face personal liability for the company’s debts.
A Director will want to make sure they minimise the possibility of being reported for wrongful trading. Generally, where the directors of the business have initiated the closure of the business through a creditors voluntary liquidation, they are much more likely to be able to show the liquidator that they have acted properly. However, if directors seemingly abandon their duties and leave the company to be wound up, it is far more likely that the appointed liquidator will take a dimmer view of their conduct.
I think from this it is clear why, when I am asked by directors whether it is better to initiate a creditors voluntary liquidation process or simply abandon the company and wait for it to be compulsorily wound up, I always recommend the CVL route. In this way the directors are far more in control of the process and the risk of wrongful trading and disqualification is much reduced.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited (http://coopermatthews.com), and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services with significant experience working with small to medium sized companies. They offer straight forward insolvency advice to turnaround your businesses troubles.
More information is available at http://coopermatthews.com/company-liquidation.html
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