If so, you need to proceed with caution. There are many rules governing the liquidation process. Firstly, you should first speak with fellow directors and seek professional advice. Resignation may be an option but your primary responsibility is to protect the company creditors. You may remain personally liable even if you were to resign.
In general, on the appointment of a liquidator, the powers of a director cease. You should be aware that a company is technically insolvent when it cannot pay it’s debts as they fall due. It is possible to incur personal liability as a director where you continue to let the company trade even though you know it is not in a position to pay it’s debts as they fall due.
As a director you could be liable under both civil and criminal law if the company trades in a fraudulent or reckless manner with the intention to defraud creditors. This would affect any other directorships you may hold in other companies and may limit any involvement you may have in any company for some time in the future. In order to avoid a restriction order, a director must prove to the court that s/he acted honestly in relation to the affairs of the company. Once a liquidator is appointed, s/he can also make an application to hold a director personally liable for the debts of a company on foot of the company’s failure to keep proper books of account. The court may also hold a director liable for the company’s debts where it considers that the director has contributed to the company’s inability to pay its debts or has resulted in substantial uncertainty as to the assets and liabilities of the company or where the director has substantially impeded the orderly winding up of the company.
Also, directors of the company can be held liable to an unlimited extent for the debts of the company not only if there is a deliberate fraud but also if you are party to the company either: – carrying on business when you ought to know that the creditors are likely to lose as a result of carrying on or incurring a debt where there is no reasonable grounds for believing that the debt can be paid. You could be liable for reckless trading even when your intentions are not dishonest in any way.
What should you do?
A creditor’s voluntary liquidation is the most common way to deal with an insolvency situation. However, you should get advice on the best way to proceed in your individual case. Here, the company must hold a statutory shareholders meeting in order to formally put the company into liquidation and appoint a liquidator. Thereafter, a creditors meeting must be held. You must provide all creditors with at least 10 days’ notice of a creditor’s meeting. Notice must also be put into two local daily newspapers. There are certain consequences of a creditor’s liquidation, for example; the creditors can replace a liquidator appointed by the shareholders and the creditors can appoint a committee of inspection to monitor the progress of the liquidation.
What do I say at a creditor’s meeting?
At the creditors meeting, the nominated director, who acts as chairman of the meeting, will give a brief outline of the history of the company and details of the causes of failure. It is advisable for the director to seek professional advice on the preparation of this statement. Thereafter s/he will read out the statement of affairs of the company. The creditors are entitled to raise questions on the statement of affairs which are answered by the nominated director. Here are some examples of questions asked by creditors; when did the company cease trading? When did the directors first realise that the company was insolvent? What major payments were paid in the last three months?
Overall, as a director, it is important that you act in accordance with legislation so as to prevent your exposure by way of civil or criminal liability.