While there is always hope that a troubled business can be rescued, it’s an unfortunate fact that over twenty thousand companies in 2022 underwent liquidation. The company liquidation process entails more than just the dissolution of company assets and the closure of operations, however, and it inevitably casts a spotlight on the company directors.
The first thing that happens to a director of a company in liquidation is that they have control of the company and its assets taken from them and placed in the care of a liquidator. After this point, directors must follow all of the instructions provided by the liquidator, including requests for information and paperwork. The liquidation process is rarely a straight-forward one, especially in the case of Creditor’s Voluntary Liquidations (CVLs), so a number of things may or may not happen to directors once formal proceedings begin.
Below, we have outlined the most common implications along with the material effects they may have on directors.
Are directors personally liable for company debt?
Debt belongs to the company rather than the directors themselves, but there are circumstances in which directors may find themselves personally liable for company debt.
The main thing to bear in mind is whether or not you have secured any company debts with a personal guarantee. If you have signed a personal guarantee then you will be liable for the associated debt and repayments will be your responsibility. Should a director resign from a company in liquidation whilst holding a personal guarantee, then they must still abide by the terms of it and repay the debt.
You could also be liable for company debt in other circumstances, including overdrawn current accounts and debt that has been created through fraudulent trading.
Can you be a director of another company after a liquidation?
As part of the liquidation process, all directors will be investigated to see if their conduct contributed to business’ demise. In most cases, you can still be a director after liquidation providing that no concerns are raised about your behaviour during these investigations.
However, the Department for Business, Energy and Industrial Strategy do have powers to disqualify directors found guilty of wrongdoing. Bans can range from 2-15 years depending on the circumstances.
Can a director of a liquidated company get a mortgage?
As well as the obvious impact on a director’s ability to do business, liquidation can also have an impact that extends to aspects of your personal life. For example, it is important to be aware of how your mortgage may be affected.
Directors of a liquidated company can get a mortgage, but there may be additional challenges or criteria to meet. Should you be personally liable for some of the company debt, your credit score will likely be affected which can negatively impact how you are viewed by a mortgage lender. Remember that criteria vary from lender to lender, so you should always speak to a professional first if you are worried about your ability to get a mortgage.
Can directors reuse a company name?
When a company goes into liquidation, there are restrictions on directors being allowed to reuse the company name and Section 216 of the Insolvency Act 1986 prohibits a company name from being reused.
There are some exceptions if you are a director wishing to reuse a company name, including if you buy business assets from the liquidator. You can also obtain official permission to use the name from the court, providing this is sought within seven days of liquidation.
There are strict penalties for directors who do not abide by the rules, including a 5-year ban on forming, managing or promoting a company with the same name as the one that was liquidated, so it is really important that you fully understand your rights and obligations and seek professional advice.
