What are director responsibilities and legal obligations when closing a solvent company?
A solvent limited company can be closed down by striking it off the official register or by entering a process called Members’ Voluntary Liquidation (MVL). If they choose to strike off their company, directors must ensure that all creditors are informed of the impending closure.
Directors are also responsible for ensuring their business is officially solvent, as contingent liabilities can tip a company into insolvency unexpectedly. These are liabilities that can materialise in the future, such as employee claims against the company.
What are directors’ legal duties when closing an insolvent company?
When a company enters insolvency, directors’ duties change and they must prioritise their creditors’ interests. So under what circumstances might a director be judged to have failed in this duty?
These are just a few actions that could lead to allegations of misconduct:
- Continuing to trade in the knowledge that the company was insolvent, or when they reasonably ought to have known
- Repaying a single creditor in preference to others
- Selling or hiding assets to deprive creditors of funds
- Issuing illegal dividends
What are the ramifications for directors of failing in their legal obligations?
Personal liability
Directors could face personal liability for some or all of the company’s debts by failing to meet their legal obligations and responsibilities. For example, trading wrongfully might lead to personal liability for any additional financial losses suffered by creditors.
Disqualification for up to 15 years
Under the Company Directors Disqualification Act (CDDA), directors can be disqualified for 2-15 years, which could also impact their ability to take on other jobs, such as in accountancy or law, or take on certain roles like pension trustee or school governor.
Prison sentence
If serious fraudulent activity is uncovered, a criminal case might be brought against a director, which could lead to a prison sentence.
Don’t Fall Foul of Unqualified AdviceSeeking professional advice before closing a company
With such serious repercussions for failing to carry out their legal obligations, directors need to seek professional advice when closing a company. This ensures they take the most appropriate route for the business and can avoid potential allegations of wrongdoing.
Company Closure can provide more professional guidance in this area. We operate offices around the UK, so please get in touch with one of the team to arrange a free, same-day consultation.
Definition
Members’ Voluntary Liquidation (MVL) is a legal procedure for closing a solvent company. This process involves the orderly winding up of the company’s affairs, paying off all outstanding debts, and distributing any remaining assets to the shareholders. It is a voluntary process initiated by the company’s directors and approved by its shareholders, typically used when the company has fulfilled its purpose or the owners wish to retire or move on to other ventures.
Legal Framework
The Members’ Voluntary Liquidation process is governed by key UK legislation, primarily the Insolvency Act 1986. This act outlines the procedures and requirements for legally winding up a solvent company, ensuring that all steps are taken in compliance with the law. Additionally, the Companies Act 2006 provides relevant provisions regarding the responsibilities and duties of directors and shareholders during the liquidation process.
Related Posts
25,000+ Company Directors Supported – Partner Led Service
At Company Closure we have a nationwide team of licensed insolvency practitioners and company closure experts here to help you understand your options. Whether your company is solvent or insolvent, there is a closure method out there to suit you.
Call our team of licensed insolvency practitioners today:
