5 Mins
When a business faces insolvency, directors often find themselves navigating unfamiliar and stressful territory. Understanding your responsibilities and rights during company liquidation is crucial, not only to comply with the law but also to protect yourself from potential personal liability.
In this article, we answer the most common questions directors have about company liquidation, from whether you can walk away from company debts to what happens if you’ve personally loaned money to your business.
Questions and Answers
Can I just walk away, and leave the problem to the company?
Once the company enters liquidation, directors have legal duties to cooperate with the liquidator, including providing records, information, and explanations.
Failure to do so can result in:
- Disqualification as a director (under the Company Directors Disqualification Act 1986)
- Fines or, in extreme cases, criminal charges
Do the debts die with the company, meaning I can’t be held responsible?
Generally, company debts remain with the company.
However, directors can be personally liable in cases of:
- Wrongful trading (continuing to trade while knowing the company is insolvent)
- Fraudulent trading
- Personal guarantees signed for loans, leases, or credit facilities
- Unlawful dividends paid when the company had insufficient distributable profits
If I resign before liquidation, am I responsible?
Resigning before liquidation does not absolve a director of responsibility for actions taken while in office. The liquidator will review conduct over a period leading up to insolvency, typically up to three years.
Can I transfer the assets to a new company (‘phoenixing’) and continue trading?
While a “phoenix company” can be legally set up, there are strict rules:
- Assets must be sold at fair market value
- There must be no deception of creditors (e.g., using a similar company name without proper notice under Section 216 of the Insolvency Act 1986)
- Breaching these rules can lead to personal liability and criminal sanctions
Does the liquidator work for me, not the creditors?
The liquidator’s primary duty is to the creditors, not the directors or shareholders. Their job is to:
- Realise company assets
- Investigate director conduct and asset disposals
- Distribute funds to creditors according to statutory order
Can I pay off some creditors first, like friends or key suppliers?
This is known as giving an unfair preference, and it’s illegal under insolvency law. If a director causes the company to favour one creditor over others when insolvent, the liquidator can:
- Reverse the transaction
- Hold the director personally liable
Can I delay dealing with the liquidator or hide records?
Deliberate obstruction, destruction of records, or non-cooperation can result in:
- Director disqualification
- Court proceedings
- Personal liability
- Even criminal prosecution in serious cases
If I loaned the company money, will I get it back before other creditors?
Director loans are treated as unsecured debt, usually ranked after secured and preferential creditors.
You will often receive little or nothing unless funds remain after other claims are satisfied.
Will HMRC chase me personally for tax debts?
HMRC can pursue personal liability notices (PLNs) against directors in some cases, especially for:
- Unpaid PAYE, NIC, or VAT
- Where there’s evidence of deliberate tax evasion, fraud, or repeated insolvencies
- For the unpaid income tax on an unpaid Director’s Loan
Does liquidation end my involvement immediately?
Even after liquidation begins, directors:
- Must assist the liquidator as required
- Remain legally obligated to preserve company records
- May be subject to ongoing investigations or legal actions
Liquidation doesn’t have to mean the end of your professional reputation or future business opportunities, but handling it correctly is vital. Directors who understand their legal obligations and work proactively with a licensed insolvency practitioner can avoid personal risk and achieve a smoother resolution.
If your company is struggling or facing potential insolvency, seek expert advice early. A professional insolvency practitioner can help you understand your options, including restructuring, voluntary liquidation, or other alternatives, before it’s too late.