In many circumstances, your personal assets should naturally be protected during liquidation. However, there are some instances where this is not the case. In this blog, we’re looking into how to protect personal assets when liquidating a business.
What happens when you place a company into liquidation?
The exact stages of liquidation vary depending on which method you choose. These may include Creditors Voluntary Liquidation (insolvent liquidation), Members’ Voluntary Liquidation (solvent liquidation) or Compulsory Liquidation. There are other methods of company closure that you may also consider. Some of these are dependent on your company’s financial position.
In all liquidations, the director’s actions will be assessed. As a company director, you must adhere to your director’s responsibilities. If it is found that you have not adhered to these, you will face the consequences, which may include being personally liable for debts.
An example of this comes from a director who has left their company with debts and ended up in compulsory liquidation. This is an example of a director who has not adhered to their responsibilities as they have not acted in the best interest of their creditors.
Director’s conduct report
When directors are assessed, a directors’ conduct report is completed. The report is used to identify any wrongdoing on the director’s behalf and highlight actions that the director has taken that may have led to the company’s insolvency.
If wrongdoing is found, then the director may face a range of consequences, such as fines, disqualification, personal liability and even prison.
If you are worried about wrongdoings being uncovered, you must seek professional advice as soon as possible. Since they will be uncovered, you are better off having them out in the open from the beginning of the process.
When are directors responsible for company debts?
Usually, a director will not be responsible for the company’s debts. This is because limited companies have an extra layer of protection. Limited liability companies are separate legal entities to the directors.
If your insolvent company enters liquidation, then a licensed insolvency practitioner will be appointed. They will be responsible for selling company assets and finding money within your company. This money can be used to pay off company debts and creditors. If there is no money left, and you have acted responsibly as a director, the excess debts will likely be written off.
If you are found to have committed wrongdoings, you can be responsible for company debts. We’ll discuss these in more detail below.
What is labelled as wrongdoing in company liquidation?
As a limited company director, you are expected to act in the best interests of your creditors. If you commit any of these things, you will likely find yourself in trouble.
Wrongful trading
When your company first begins to struggle, the best thing to do is cease trading and seek advice. Instead, some directors choose to continue trading in the hope that it will help them financially. This can lead to further issues for your creditors.
This kind of trading will be identified and will be labelled as you not thinking about the best interests of your creditors.
Preferential payments
These payments are made from the company to someone else who is not first in line for payments. Here’s an example.
Let’s say you own a business that has started struggling financially, so your friend sends you £5,000 to get the business back on track. It might work for a while, but the business finds itself struggling again, and you owe creditors money. Instead of paying them, you decide to send your friend their £5,000 back. This is a preference payment as your friend is not legally the next in line for payment.
When a company enters liquidation, its company accounts will be looked at in-depth. This means that any preference payments will be identified. Secured and unsecured creditors should be paid first in an insolvent liquidation.
Selling assets undervalue
As a director of a struggling company, you might be looking for any way to make money, which means you might consider selling assets for any price you can. This will be labelled as wrongdoing. Instead, if you choose to sell any assets, they must be sold at market value. You must contact an independent valuation company to assess the items and keep evidence of this.
Fraudulent trading
Some directors choose to continue taking orders even when they cannot afford to fulfil the order. This is known as fraudulent trading and will not be taken lightly when you enter liquidation of any kind.
Personal guarantees
Directors should be aware of the risks associated with personal guarantees before they sign them. Personal guarantees act as a promise to creditors that if the company cannot afford to pay the money back, the director will step in and do so.
This means that if your company becomes insolvent, you will be responsible for paying the money back. You are very unlikely to be able to escape a personal guarantee, and failure to pay could lead to bankruptcy.
What’s the best thing to do as a director?
Generally speaking, if your company begins struggling financially, then you should cease trading and seek professional advice. This will reflect positively on you as you take action in favour of your creditors prior to insolvency proceedings.
You should always avoid all wrongdoing as a director if you do not want to find yourself in trouble.
If you have committed wrongdoing, you need to be honest about it. It’s better to know the outcome early rather than leaving it to be uncovered at a later date. The sooner you act, the better the outcome will be.
We hope this blog has been helpful regarding how to protect personal assets when liquidating a business.
At 1st Business Rescue, we are on hand to support you with all aspects of company closure and liquidation. Contact us today to see how we can help.
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