When a company faces liquidation, many directors feel overwhelmed and uncertain about what comes next. But one of the most important aspects of this process is understanding your legal obligations. If you’re a company director navigating liquidation, knowing your responsibilities can help you avoid personal liability and ensure the process is handled correctly. This blog sets out director duties during liquidation and what you must do to stay compliant under UK insolvency law.
Understanding Liquidation: A Quick Overview
Liquidation refers to the formal process of closing a company. It involves selling company assets, paying creditors, and ultimately dissolving the business. There are two main types of liquidation that directors typically deal with:
- Creditors’ Voluntary Liquidation (CVL): When the company is insolvent and unable to pay its debts.
- Members’ Voluntary Liquidation (MVL): When the company is solvent, but the directors and shareholders have chosen to close it.
Regardless of the type, the law imposes strict expectations on directors from the moment insolvency is identified or liquidation becomes inevitable.
Core Director Duties During Liquidation
Here are the primary responsibilities directors must observe:
1. Cease Trading Immediately
Once you suspect your company is insolvent, you must stop trading right away. Continuing to trade while knowing the company can’t pay its debts may be deemed wrongful trading, which can result in personal liability.
2. Act in the Best Interests of Creditors
During liquidation, your legal duty shifts from the interests of shareholders to those of creditors. You must do everything possible to minimise losses to creditors, including preserving company assets and avoiding any preferential payments to certain parties.
3. Preserve Company Records
You’re legally obliged to keep and safeguard all relevant company records. This includes financial statements, bank statements, contracts, invoices, and correspondence. Failure to provide accurate records can lead to further investigations and penalties.
4. Cooperate with the Insolvency Practitioner
A licensed Insolvency Practitioner (IP) will manage the liquidation process. You must provide full cooperation, including access to records, attendance at meetings, and truthful responses to any enquiries. Non-cooperation can lead to delays or even legal action.
5. Disclose All Company Information
You should disclose all information regarding company assets, liabilities, ongoing contracts, and transactions. Hidden assets or undeclared dealings can result in accusations of misconduct.
6. Avoid Preferential and Undervalued Transactions
It’s critical not to move company assets to family members, connected parties, or for less than their market value. Such transactions can be reversed by the IP and may result in personal claims against you.
7. Do Not Take on New Credit
Once aware of financial distress, taking on new credit that the company cannot repay is a breach of your duties. This may be seen as misfeasance or fraudulent trading.
What Happens If Director Duties Are Breached?
Failure to uphold your duties during liquidation can have serious consequences, including:
- Disqualification as a director (for up to 15 years)
- Personal liability for company debts
- Legal action for fraudulent or wrongful trading
- Criminal prosecution in severe cases
Why Professional Advice Matters
Every company situation is different. Understanding director duties during liquidation is not just about protecting your business; it’s also about protecting yourself. Engaging a qualified Insolvency Practitioner early ensures you’re following the correct procedures and meeting your legal obligations.
Need Guidance You Can Trust?
At Simple Liquidation, we specialise in helping company directors navigate the complexities of liquidation with confidence. With over 30 years’ experience and a team of licensed Insolvency Practitioners, we provide straightforward, professional advice that protects your interests every step of the way.
If you’re unsure about your responsibilities or need guidance on the best route forward, contact Simple Liquidation for a free, no-obligation chat. We’re here to support you.
