When a company becomes insolvent, the duties of the directors shift from promoting the success of the company to minimising its losses and acting in the best interests of its creditors.
Failure to act in a certain way could result in accusations of wrongful or unlawful trading and could ultimately result in significant fines, director disqualification, and you could even become liable for some of the company’s debts.
But how do your responsibilities shift as a director once liquidators have been appointed? Read on to find out…
Directors’ responsibilities once liquidators have been appointed
Stop trading when you realise your company is insolvent
Yes, we’re taking things back a step here, but it’s important to note that even before liquidators have been appointed, the moment you realise that your company is insolvent you should stop trading.
This means you can’t issue any invoices, pay any staff, or even attempt to seek finance elsewhere. Any action that is found not to be in the interests of your creditors could put you at risk of accusations of wrongful trading, as explained in Section 214 of the Insolvency Act 1986.
This is because once a liquidator has been appointed, they must investigate the behaviour of the company directors in the period leading up to insolvency. Should wrongful trading be proven, you could be disqualified from serving as a company director for up to 15 years.
Even more seriously, if fraudulent trading is proven, you could be faced with fines, penalties, and even a potential prison sentence.
Your powers as a director will cease
Once an insolvency practitioner has been appointed, company directors will cease to hold directorial powers as is laid out in Section 103 of the Insolvency Act, unless you are instructed otherwise by the liquidator.
Call a shareholder meeting
Next up, once your company has ceased trading, the company directors must call a shareholder meeting. If your company is entering into a voluntary liquidation, at least 75% of the shareholders must vote to wind up the company.
At this stage, if you haven’t already appointed an insolvency practitioner, it is now a legal requirement to do so.
Prepare the statement of affairs
This is one of your final key roles as a director. A statement of affairs is essentially a handover document to ensure that the insolvency practitioner is up to speed on the company’s situation.
In it, you must break down the company’s current financial situation and include important information such as asset valuations, a recent balance sheet, a list of all your employees, a list of all your creditors and suppliers, and full details of all the debts owed.
Deliver any books or records
Once a liquidator has been appointed, you have a legal obligation to co-operate with them and must deliver any books or company records they ask for to complete their investigation. Failure to do so could result in the court compelling you to deliver them or your records being forcibly seized.
Agree to be interviewed by the liquidator
As part of the liquidation process, the liquidator might ask for an interview with the company directors which you are legally obligated to attend. You must also answer all of the liquidator's questions to the best of your ability.
This is a really important part of the process, because should the interview give the liquidator any cause for concern about the way the business had been run in the lead up to becoming insolvent, or if you fail to comply with the liquidator’s requests, allegations of misconduct could be made and may even result in an investigation by the Insolvency Service.
Convening the deemed consent procedure
Previously at this stage, company directors would have called a creditors’ meeting, however, the process has now changed.
Instead, the director (or convener) must now ask the insolvency practitioner to convene the “deemed consent procedure,” which is essentially a means of gaining the consent of the creditors over matters such as the appointment of the liquidator.
Unless more than 10% of creditors oppose, this will be deemed as consent to move forward with the liquidation.
Dealing with directors’ loan accounts
Finally, any overdrawn directors’ loan accounts will be treated as a debt that must be repaid for the benefit of the company’s creditors.
If you are unable to repay the loan from your personal funds, you may have to investigate a personal insolvency solution such as an IVA or even bankruptcy.
How we can help company directors
When a liquidator is appointed, they work in the best interests of the company creditors. However, should your company be facing insolvency, at McAlister & Co our priority is you.
As business insolvency experts, we will support you every step of the way and provide all the advice and assistance you need to help you navigate this unchartered territory.
For more advice on how we can help, contact our expert team today to find out more.
