A liquidator has been appointed to run my company. What does this mean?

What is a liquidator?

A liquidator is either an Official Receiver or an authorised insolvency practitioner, who is appointed when a company either chooses voluntary liquidation, or enters compulsory liquidation following a winding-up order. The role of a liquidator is to deal with the affairs of a company that is in the process of being wound-up.

The liquidator acts in the best interests of a company’s creditors with the goal of recovering and realising the company’s assets, then using those assets to pay off the company’s debts as far as is possible.

What happens after a liquidator is appointed?

Immediately after a liquidator is appointed, the powers of the company’s directors cease and the liquidator takes control of the company’s assets. All of the contracts of the company’s employees are immediately terminated, and they are automatically dismissed. There is also a stay on the commencement or continuation of legal proceedings against the company, except with the permission of the court.

The liquidator will then use their powers to attempt to recover and realise the company’s assets for the benefit of the company’s creditors.

How can a liquidator recover or realise assets for the benefit of creditors?

A liquidator has broad powers under the Insolvency Act 1986 to recover and realise the assets of a company including, but not limited to:

1. Selling the company’s property;
2. Bringing or defending legal proceedings on the company’s behalf;
3. Raising money on the security of the assets of the company;
4. Continuing the business of the company; and
5. Challenging transactions made by the company prior to their appointment.

Liquidators can also bring to an end any unprofitable contracts or give up any property owned by the company that is not readily saleable – this power is often used to bring a company’s commercial lease of its premises to an end.

Who gets paid first?

Usually once a liquidator has been appointed, they will investigate who the substantial creditors are of the company (both secured and unsecured). A ‘Proof of Debt’ document will be circulated to the known creditors of the company whereby, they will be responsible to quantify the company’s alleged debt that is owed to them, and it is then up to the liquidator to either admit, partially admit or otherwise reject the creditor’s proof of debt.

Once the liquidator has performed their thorough investigations and has successfully recovered and realised all available assets of a company, they then provide the Creditors with a ‘Report to Creditors’. In this report they detail their investigations, quantity the available assets and further advise of the likely distribution to the creditors (if any distributions can be made). This can be challenged by a director.

Once the liquidator has circulated the Report to Creditors (which a director will also be given), it will then pay out the company’s known creditors in a specific order of priority. The order for payment is:

1. The costs incurred during the insolvency process itself;
2. Secured creditors with a fixed charge
3. Payments to creditors with special statutory priority (referred to as 'Preferential Creditors')
4. Secured creditors with a floating charge
5. Unsecured creditors
6. Shareholders

Who counts as a “Preferential Creditor”?

Any party that is owed a "Preferential Debt" by the company in liquidation qualifies as a Preferential Creditor.  There are many types of preferential debt, however the most common include:

1. Contributions to occupation and state pension schemes;
2. Wages and salaries of employees for work due in the four months prior to the insolvency date, up to a maximum of £800 per employee;
3. Holiday pay due to any employee whose contract has been terminated, whether that termination occurred before or after the insolvency date;
4. Commercial rent arrears to a landlord; and
5. Certain tax debts, including potentially VAT, PAYE income tax, and National Insurance Contributions.

All of the above, and other Preferential Debts, must be repaid prior to conventional secured and unsecured debts.

 I am a director.  Will I have to personally contribute to my company’s assets?

Ordinarily, no, as a director you would not necessarily be expected to, or compelled, to contribute to the company’s assets.

However, if you have given a personal guarantee for any of the liabilities of the company (e.g. personally guaranteed or co-signed an inter company or director’s loan), then you may be held personally liable under that guarantee – liquidation does not remove this responsibility and therefore, a liquidator can commence proceedings against you personally.

Secondly, there are circumstances where 'clawback' proceedings can be brought against a director, for example preferential payments and transactions at an undervalue (see our post here for further details).

Also, if, in the course of the winding-up of the company, you are found liable of wrongful or fraudulent trading, or other breaches, then a court order can be made compelling you to make a contribution to the company’s assets.

What is wrongful trading and fraudulent trading?

Broadly, you can be held liable for wrongful trading if you are a director and it appears that you knew, or ought to have known, that there was no reasonable prospect that the company would avoid going into liquidation, prior to the commencement of the liquidation, but continued trading.

Generally, you can be held liable for fraudulent trading if you carried on any business of the company with the intent to defraud creditors, or for any other fraudulent purpose. Crucially, this applies to anyone who is party to the carrying on of business, it does not apply just to directors.

Wrongful trading is a civil offence and can result in you being personally liable for a company's debts as well as being disqualified as acting as a director for up to 15 years.  Fraudulent trading is a criminal offence which, in addition to personal liability and disqualification, can result in a sentence of imprisonment of up to 10 years.

During Covid-19, the Government implemented new regulations to suspend wrongful trading liability rules for a time-limited period to assist businesses during the pandemic. Directors could ultimately use this as a tool to escape liability.  However, this temporary restriction expired on 30 June 2021.

Is there a risk of director disqualification as a consequence of liquidation?

Ordinarily, no, simply being a director of a company that has gone into liquidation is not a reason, on its own, for a director disqualification order to be made against you.

However, a liquidator does have broad powers to scrutinise the company’s finances and dealings during their tenure and will report any suspected breaches of duties, misconduct, or misfeasance (including wrongful or fraudulent trading). These factors could well go on to form the basis of director disqualification proceedings, if they are found to have occurred.

What should I do if I am worried about any of the issues raised in this article

If you are concerned about, or in the process of undergoing, any of the processes discussed in this article, we recommend that you seek urgent specialist independent legal advice.

Click here or call 02071838950 to contact one of Brett Wilson LLP's specialist insolvency solicitors