Michael Reid: What will liquidation mean for me and my company?

Michael Reid: What will liquidation mean for me and my company?

Michael Reid

Michael Reid, a licensed insolvency practitioner and managing partner of accountancy firm MHA, discusses the implications of liquidation.

The ongoing impact of interest rates at a level higher than we have been used to for many years, coupled with sluggish demand due to the cost-of-living crisis, means that many businesses are experiencing choppy financial waters.

We often see articles about the challenges facing industries such as construction, leisure, retail and hospitality, and these tend to be the industry sectors from where the MHA insolvency team are approached most often by worried directors.



Clearly, if it is possible to formulate a plan that restructures the business and allows continued trading on a profitable basis a positive outcome is created. However, if a situation has become wholly untenable, liquidation may be the only practical route. Every insolvency practitioner will always encourage a director of a financially distressed company to approach them as early as possible. It certainly increases the chances of saving a business. In the first of two articles, I will look at some of the questions asked on a regular basis by worried directors …

Will I be automatically disqualified from acting as a director if my company is liquidated?

No. A liquidator’s statutory duties include preparation/submission of a report on anyone who has been a director in the last three years to the director disqualification unit of The Insolvency Service (TIS). This, together with other enquiries that TIS may undertake, will allow TIS to reach a decision about instigating disqualification action. Normally one would expect notification of TIS interest to a director within 9 to 12 months of liquidation inception. This will usually commence with an exchange of correspondence clarifying various aspects of a director’s conduct prior to liquidation and clearly, a director has an opportunity to defend a disqualification action raised in court. The MHA team have extensive experience in acting for TIS when seeking to pursue a director, and defending directors who attract TIS attention.

Who will pay my staff if there is no money in the company?

The State, as represented by the Redundancy Payments Office (RPO). Employee entitlements at the date of liquidation cover unpaid salary, accrued holiday pay, notice pay and redundancy, with each part of this being limited to a weekly maximum of £643 (increased annually). If the business is sold as a going concern to another entity, it is normal for the liability for all unpaid entitlements to pass to the buyer. Accordingly, great care is required if closure/permanent cessation of trading is not the anticipated outcome.

Will I be made bankrupt if my company is liquidated?

Probably not. The only company debts for which a director has liability are those for which a personal guarantee has been granted, typically the bank, but one may have been signed in favour of trade suppliers. When the liquidator advises creditors that they will not receive full settlement, it is normal for any creditor holding a personal guarantee to ask the director for repayment proposals for the unpaid portion such that a negotiation process can begin. All other debts remain with the company unless particularly unusual circumstances apply, e.g. successful action against the director for wrongful trading.

Will liquidation affect my personal credit rating?

Unless you have been pursued personally as explained above and fail to settle whatever debt is due, there will be no adverse impact upon your credit rating.

Can I start another limited liability company immediately?

Yes. However, you should be aware that section 216 of the Insolvency Act 1986 prohibits you from being a director of a limited liability company with the same name/brand for a five-year period from the date of liquidation, although there is a mechanism which allows this to happen if appropriate planning is undertaken before liquidation incepts. Again, careful planning is vital.

Can my company pay local suppliers and my friends before liquidation incepts?

Insolvency legislation has a concept known as “unfair preference” which means that all creditors have to be treated equally once a director has reached the conclusion that the company cannot avoid insolvent liquidation. Therefore, it is inappropriate to pay a local supplier to the detriment of, say, HMRC or utility companies. Failing to observe this aspect of the law will only cause trouble for those who have been preferred and weigh against you if director disqualification action begins.

Will I have to remain with the company without payment in order to help the liquidator?

No. While there is a legal obligation on a director to assist the liquidator and cooperate with enquiries, the director must be allowed to earn a living elsewhere. A reasonable amount of time may be required depending upon the complexity of the company’s financial affairs, but if the liquidator considers that you are required for more than occasional assistance, it would be normal to pay an agreed rate. Frequently, a director will be able to provide early and detailed insight into many aspects of the company which will assist the liquidator to enhance asset realisations and hence, dividend prospects to creditors.

These questions/answers can only provide a flavour of each situation and require to be tailored according to specific circumstances. There is no substitute for seeking a confidential discussion at as early a stage as possible with someone who can assess the company’s position and provide experienced advice.

Share icon
Share this article: