By: Derek Cooper
Submitted: 2010-04-20 10:50:35 | Word Count: 507
If a limited company is wound up, the directors could be liable for its debts if they have allowed the business to trade while it was insolvent.
Winding up is the forced closure of a company. The process is normally started by one of the company s creditors because outstanding debts have not been paid.
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If a company is wound up, it is unusual for the creditors to receive payment for their debt. For this reason, a creditor s main objective is to stop the company from trading in the future and to force an investigation into the conduct of the directors.
Company directors investigated in Winding Up
The liquidator must carry out an investigation into the conduct of the company directors if the business is wound up.
This investigation is undertaken on any current director or anyone who has been a director of the company in the last three years. The liquidator can also investigate any individual who has acted in the capacity of a director although not registered as such at Companies House.
The purpose of the investigation is to understand whether or not the company directors have acted properly in their management of the company.
The liquidator will look especially carefully to see whether any or all of the directors have allowed the company to trade while knowing that it was insolvent wrongful trading. Wrongful trading is a serious breach of a director s duties.
So what is the likely action against a director of an insolvent company?
Once the liquidator has completed their investigation, they will submit their report on the directors conduct to the Insolvency Service. This is known as a directors disqualification report or D1.
If the liquidator believes that any director has been involved in wrongful trading, they will recommend that the insolvency service take action against the director.
The insolvency service will consider two main actions:
1. Director disqualification If found to have allowed a company to trade while insolvent, a director could be disqualified from continuing to act as a director for other businesses. If disqualified, a director will have to stand down from any other directorships they hold. The ban may last for a year or longer depending on the conduct of the director
2. Personal liability for company debt A director accused of wrongful trading can be held personally liable for debts incurred by the company after the director knew that the business was insolvent. This may have serious implications on the director s personal financial situation
Because of the possibility that a director may be disqualified or held personally liable for a company s debts, winding up is an extremely serious process for company directors.
Given the serious implications for directors, if your company has financial problems then take professional advice as soon as possible.
If the business should be closed, the directors will be far better protected if they initiate the process themselves using voluntary liquidation.
There are alternative solutions that may save the company and avoid any need for investigation, these include Company Voluntary Arrangement.
