Can a director be held responsible for a liquidation?

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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 process for doing this is known as Liquidation. The liquidation directors responsibilities will require realising the assets of the company and distribute any proceeds to the company’s creditors. Any cash left over is returned to the shareholders. The company is then closed, any outstanding leases canceled and remaining staff made redundant.

Depending on the status of the business there are different types of Liquidation. 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. This is a simple process where the business is closed and all creditors paid in full. Any remaining assets or cash is then the property of the shareholders of the business to do with as they wish.

More commonly, especially in the current economic climate, 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. If no further options for raising investment can be found the business is forced to stop trading. In these circumstances, the liquidation directors responsibilities could initiate a Creditors Voluntary Liquidation (CVL) themselves. Alternatively, they could simply leave the company dormant until it is forced into liquidation by one of its creditors (often the Inland Revenue) through a winding-up order (compulsory liquidation).

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 creditor‘s 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 liquidation directors responsibilities will want to make sure they minimise the possibility of being reported for wrongful trading. It is normally the case that, 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 less favorable view of their conduct.