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A guide for Directors

1. About this Guide 

This Guide is for directors of any company involved in compulsory liquidation (winding up by the court) in England and Wales. You will also find some information about the disqualification of company directors and criminal offences in relation to a company. There is a brief summary of the other insolvency procedures that can apply to companies and an explanation of some common insolvency terms. 

The insolvency procedures apply to companies and partnerships in England and Wales only. Under the law, the term "director" applies to anyone occupying the position of a director of a company, whether they are called a director or not. The law applies equally to, for example, "executive" and "non-executive" directors. 

What is insolvency? 

The most common descriptions of insolvency are that the company cannot pay its debts when they become due or that the value of its assets is less than the amount of its liabilities, or both. "Insolvency" is also used to describe the various formal procedures that may apply to an individual or business. 

The Act of Parliament under which most formal procedures are administered is the Insolvency Act 1986. Insolvency law provides a system for dealing fairly with the assets of the insolvent individual or company and the claims of creditors. The law also deals with what happens to the individual or company following the insolvency. 

What is The Insolvency Service? 

The Insolvency Service is an Executive Agency within the Department of Trade and Industry (DTI). The Insolvency Service, through its Official Receivers, administers and investigates the affairs of bankrupts and companies in compulsory liquidation; establishes the reasons for the insolvency; and reports on misconduct on the part of bankrupts and directors. 

The Insolvency Service is not involved in the day-to-day handling of administrations, administrative receiverships, voluntary liquidations or the majority of voluntary arrangements. 
What is compulsory liquidation (winding up by the court)? 

This is an insolvency procedure that applies to companies (and partnerships) and is started by a court order - a winding-up order. A petition is presented to the court, normally by a creditor, stating that the company owes a sum of money and that the company cannot pay. It may also be presented by the company itself, its directors or its shareholders. 

A winding-up order can still be made even if the company has no assets or disputes the amount claimed. Any disputes over debts should be resolved with the creditor(s) before a winding-up order is made because the effects of the order are severe. 

There are alternatives to company liquidation. If your company is facing financial problems, even temporarily, you should consider seeking advice from your professional adviser, a solicitor, a qualified accountant or an authorised insolvency practitioner: not doing so can have serious consequences. 

Other organisations also offer insolvency advice and debt counselling. Some of them are entirely reputable and offer a professional service. However, others are controlled by individuals with no obvious qualifications who appear to be motivated principally by a desire to exploit an already difficult situation. Beware, particularly of unsolicited approaches through the post or by telephone. 

Who handles a compulsory liquidation? 

Official Receivers (ORs) handle the early stages of a compulsory liquidation. The OR will tell the company's creditors and contributories (mainly shareholders) that the company is being wound up. If there are significant assets, an insolvency practitioner (IP) may be appointed as liquidator in place of the OR, either by the Secretary of State or at the first meeting of creditors or contributories (shareholders). 

The liquidator's role is to realise the company's assets, pay the fees and charges arising from the liquidation and share out any remaining funds to the creditors. In very rare instances a surplus may be available for distribution to shareholders. 

Who are Official Receivers (ORs) and insolvency practitioners (IPs)? 

ORs are appointed by the Secretary of State and are officers of the courts to which they are attached. 

As well as administering cases, ORs have a duty to investigate the affairs of individuals in bankruptcy and companies in compulsory liquidation. They report any evidence of criminal offences and conduct which makes an individual unfit to be a company director to The Insolvency Service's Headquarters. 

IPs work in the private sector. They are usually accountants or solicitors. They must be authorised by the Secretary of State or by one of the Recognised Professional Bodies (RPBs) before they can act as IPs. The majority of IPs are authorised by RPBs. 

IPs acting as administrative receivers, administrators or liquidators in creditors' voluntary liquidations, report evidence of unfit conduct by directors in those proceedings to The Insolvency Service's Headquarters. 

2. Compulsory liquidation (winding up by the court) - the procedure 

Please see the flow charts on "Procedure in majority of compulsory liquidations" and "Payments to creditors in compulsory liquidations". 

Will I be notified when a winding-up order is made? 

As a director of the company you should know its financial position and whether any creditors are pressing for payment by letters, statutory demands and court proceedings. These may lead to a petition to wind up the company. 

When a winding-up order is made, the court will notify the OR, who will then send notice of the order to the directors. In some cases the OR will need to interview you at once. This can happen if there are urgent matters to be dealt with relating to the company's business, employees or assets. 

Can the winding up be stopped once the order has been made? 

The process can only be stopped by the court. Any application to cancel a winding-up order (a process called rescission) should be made within 7 days of the order. An application can also be made to review or vary the order or an appeal can be made to a higher court. If you intend to take any action, you should seek professional advice at a very early stage from a solicitor, a qualified accountant or an authorised IP. You must also tell the OR and you must continue to co-operate with the OR in the meantime. 

If the company is still trading, what will happen? 

The OR will usually visit the company's premises to assess the situation. The OR has limited powers to continue a business and these will be used in very few circumstances. Any employees will be dismissed and the assets and premises secured. It is unlikely that trading will continue. 

What will happen to me once my company has been wound up? 

You will no longer have control of the company's business, assets and property. Most of your powers as director will cease and, in general, you are no longer entitled to act for or on behalf of the company (directors still keep some very limited powers, for example, appeal of the order). It follows that you will not be able to manage the affairs of the company on a day-to-day basis. Your duties and responsibilities as a director do not, however, cease. 

You may, for instance, be required to assist the OR in disposing of assets. 

If you are also an employee of the company, your employment will terminate on the winding-up order. You will be given details by the OR/IP about how to claim for any unpaid wages or other monies owed to you as an employee. 

You must not use any of the company's assets to make payments to creditors or for your own use and benefit. 

What information do I have to supply and when? 

If you were not interviewed immediately when the winding-up order was made, the OR will write to you to arrange an appointment for you to attend at his or her office. The letter will give the name of the person dealing with the liquidation and will tell you what you have to bring with you. You will also be sent a questionnaire to complete. 

At the interview, you will have to: 

You may be asked to: 

Do I have to supply information about the company to the OR/IP? 

Yes, you have a duty to provide information and co-operate with the OR/IP. Failure to co-operate is a serious matter and can result in your being publicly examined by the OR before the court, when creditors may also ask questions. If you do not attend such an examination without giving the court a good reason, for example, serious illness, a warrant for your arrest may be issued. Your failure to attend or refusal to give information may be treated as a contempt of court for which the penalties may be a fine or imprisonment or both. It will also be a factor in deciding whether you are fit to be a director. 

Will I have to pay any of the company's debts? 

You may be required to contribute to the company's assets if you have misapplied company funds or if the company has traded wrongfully or fraudulently. 

If you are a shareholder of the company, you may be asked to make a payment for any shares that have not been fully paid up. 

If you, or any other person, have guaranteed any of the company's debts, it means that you have agreed to pay the debt if the company cannot. When a creditor becomes aware of the liquidation, you may be asked to make full payment subject to the terms of the guarantee. 

When will the company cease to exist? 

When the winding up is complete, the OR/IP will apply to be released from the office of liquidator. ORs are released by the Secretary of State. IPs are released following a final meeting of creditors. On release, the OR/IP sends a notice to the Registrar of Companies and the company will usually be dissolved 3 months later. It then ceases to exist. 

During this liquidation, can I act as the director of another company? 

You can act as the director of another company unless you are subject to a disqualification order, have given a disqualification undertaking, are an undischarged bankrupt or, after 1 April 2004, are subject to a bankruptcy restrictions order or undertaking. A disqualified person most obtain the permission of the court to act as a director or to be concerned in the promotion, formation or management of a company. 

You cannot be involved in another company or business that has or uses a name which is so similar that it suggests that there is an association with the failed company. This restriction lasts for 5 years after the winding up and applies: 

Procedure in most compulsory liquidations

Click here for flow chart

This restriction does not apply if the other company had already been known by that name during the whole of the 12-month period and was not dormant in that time. 

If you do not comply with this restriction or act as a director without leave of the court while an undischarged bankrupt or while disqualified, you may be held personally liable for the debts of the new or successor company. You may also be committing a criminal offence. If you believe that these restrictions may apply to you, you should seek advice on your own position.

Payments to creditors in compulsory liquidations

guide for directors

 

3. Disqualification of unfit directors of insolvent companies 

What is meant by disqualification?

A disqualification order is made by the court under the Company Directors Disqualification Act 1986. The Act applies not only to a person who has been formally appointed as a director but also to those people who have carried out the functions of a director and to shadow directors. 

Without specific permission of the court, it disqualifies a person from: 

An order for disqualification can be made under a number of different sections of the Company Director Disqualification Act 1986. The order will specify the period of disqualification. For orders made against an unfit director of an insolvent company, there is a minimum period of 2 years and a maximum of 15 years.

In April 2001 disqualification undertakings were introduced, which are an administrative equivalent of a disqualification order. An undertaking may be given to the Secretary of State which has the same effect as a disqualification order, but do not involve court proceedings.

When can disqualification occur?

When a company has failed, the OR (or IP in a creditors' voluntary liquidation, an administrative receivership or an administration) has to send the Secretary of State a report on the conduct of all directors who were in office in the last 3 years of the company's trading. The Secretary of State has to decide whether it is in the public interest to seek a disqualification order. Any application is heard and decided by the court.

Examples of conduct that may lead to disqualification include: 

How will I know if a disqualification order is to be sought against me? 

Notification of a decision to apply for a disqualification order will be sent to the last address you provided to Companies House or to the OR/IP. The application for disqualification has to be made within 2 years of the date of the winding-up order (or any earlier voluntary liquidation, administrative receivership or administration), unless the court extends the time.

What happens after an application for disqualification is made?

The OR will make a report to the court on the conduct of the directors and send a copy to them. The directors will have the opportunity to give the court explanations or reasons for their actions - but may do so by a statement of truth (a written account of the relevant facts which is sworn on oath or affirmed, usually before a solicitor). There may also be statements of truth from other people (such as the company's bankers, accountants and creditors) presented as evidence to support the case for or against the directors. The court will then decide whether the conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified.

Disqualification proceedings are taken under civil law, not criminal law.

At any stage in these proceedings you may give an undertaking to the Secretary of State that has the same effect as a disqualification order and will put a stop to the court proceedings.

4. Criminal proceedings

What criminal proceedings may be taken?

The OR is required to report any evidence of possible criminal offences that are uncovered while investigating a company's affairs to The Insolvency Service's Headquarters. A decision is then taken on whether the matter should be referred to the Department of Trade and Industry's Solicitors (Prosecutions) or other prosecuting authority to consider proceedings.

Examples of possible offences are: 

The court may also make a disqualification order on the conviction of a director for a criminal offence in connection with the management of a company.

5. Where to go for further information

Who to contact: 

Questions on the procedures involved in a specific liquidation should be referred to your professional adviser or to the OR/IP handling the case.

Please note that The Insolvency Service and Official Receivers can only provide information about the administration of a liquidation they are handling. They cannot offer legal or financial advice. Where necessary, you should seek this from a solicitor, a qualified accountant, an authorised IP or a reputable financial adviser.

You can contact The Insolvency Service Central Enquiry Line for general enquiries on insolvency matters on 020 7291 6895 or email: Central.Enquiryline@insolvency.gsi.gov.uk

What to do if you are dissatisfied with the handling of the liquidation:

How to get more copies of The Insolvency Service publications

You can obtain further copies of this publication from the following website: http://www.dti.gov.uk/publications

If you have any problems using the above site please contact the DTI Publications Unit, either by telephone on 020 7215 6024, or by email to pubs.unit@dti.gsi.gov.uk

You may also order copies of our publications by telephone by calling the Publications Orderline on 0845 015 0010. You may also fax orders to the Orderline on 0845 015 0020. Minicom users should telephone 0845 015 0030.

All of our publications are also available on our website www.insolvency.gov.uk

6. Other insolvency procedures

This is a general outline of the insolvency procedures handled by IPs only (not ORs). Please contact your solicitor, accountant/ auditor, an IP or your professional adviser for further information. Alternatively, contact your local Business Link Office (see local telephone book or telephone 0345 567 765) who will be able to provide help or direct you to someone who can advise you.

If your company is in financial difficulty and a rescue is to be attempted, the earlier you seek advice the greater the prospect of success.

Warning: There are now several organisations offering insolvency advice. Some are entirely reputable and offer a professional service. However, others are controlled by individuals with no obvious qualifications who appear to be motivated principally by a desire to exploit an already difficult situation. Beware, particularly of unsolicited approaches through the post or by telephone. 

Administration

This procedure is begun by the appointment of an administrator and can be used to rescue a company having financial problems as a going concern; to achieve a better result for the creditors of the company as a whole than would be achieved in an immediate winding up or, if neither are possible, to realise property for the benefit of secured or preferential creditors. An administrator may be appointed by court order, or by the holder of a floating charge, the company or its directors filing the requisite notice at court. The administrator (an IP) puts forward proposals for consideration by the creditors to restore the company's viability, to come to an arrangement with the creditors, sell the business as a going concern or realise more from the assets than in a liquidation, or realise assets to pay a preferential or secured creditor.

Administrative receivership

This is the result of a holder of a floating charge (usually a bank) appointing an administrative receiver (an IP) to recover money owed to it. The court is not usually involved. A company in administrative receivership is also said to be "in receivership". The administrative receiver's task is to recover enough money to pay (i) his or her costs, (ii) the preferential creditors and (iii) the floating charge holder's debt. An administrative receiver does not make payments to unsecured creditors.

Provisions introduced in September 2003 mean that, in future, holders of floating charges will only be able to appoint an administrative receiver in a limited number of circumstances.

Company voluntary arrangement (CVA)

This procedure allows a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time. A CVA can be proposed by the administrator, where the company is in administration; or the liquidator, when the company is being wound-up; or the directors, in other circumstances. Before the proposal is made, an application can be made to court for a moratorium which prevents creditors from taking action against the company or its property for up to 28 days, although if an administrator is in office the company will already be covered by the moratorium arising from the administration.

A CVA cannot be proposed by creditors or shareholders.

When the arrangement has been proposed, a nominee (who must be an insolvency practitioner) reports to court on whether a meeting of creditors and shareholders should be held to consider the proposal.

The meeting decides whether to approve the voluntary arrangement. If 75% of the creditors agree to the proposal, it is then binding and all creditors who had notice of the meeting and were entitled to vote. All creditors who had notice of the meeting are bound by the terms of the arrangement.

If the meeting of creditors and shareholders approves a voluntary arrangement, the nominee (or other insolvency practitioner), becomes the supervisor of the arrangement.

Once the CVA has been carried out, the company's liability to its creditors (who had notice of the meeting of creditors) is cleared. The company can continue trading during the CVA and afterwards. A CVA can be set up when a company is in liquidation or in an administration, as well as at any other time.

Creditors' voluntary liquidation

This procedure allows an insolvent company to put itself into liquidation. It is started by the directors (not the creditors) calling a meeting of shareholders who agree to wind up the company. The shareholders may nominate an IP to act as liquidator, but the final choice is made by the creditors at their meeting. The procedure does not usually involve the court.

Members' voluntary liquidation

This procedure allows a solvent company to put itself into liquidation where, for example, a family business is sold off or the purposes of the company have come to an end. The members (shareholders) appoint their own choice of IP as liquidator. Creditors do not have to be notified. The company must be able to pay its debts in full within 12 months. If the liquidator considers that this will not be possible, a meeting of creditors must be held and the liquidation becomes a creditors' voluntary liquidation.

7. Insolvency Terms

This is a brief explanation of some of the terms you may come across in insolvency proceedings. Please note that this glossary is for general guidance only. Many of the terms have a specific technical meaning in certain contexts that may not be covered here.

Administration order
An order made in a county court to arrange and administer the payment of debts by an individual; or an order made by a court in respect of a company that appoints an administrator to take control of the company. A company can also be put into administration if a floating charge holder, or the directors or the company itself file the requisite notice at court.

Administrative receiver
An IP appointed by the holder of a debenture that is secured by a floating charge that covers the whole or substantially the whole of the company's assets. The IP's task is to realise those assets on behalf of the debenture holder.

Administrative receivership
The process where an insolvency practitioner is appointed by a debenture holder (lender) to realise a company's assets and pay preferential creditors and the debenture holder's debt. The right of a debenture holder to appoint an administrative receiver has been restricted by the Enterprise Act 2002.

Administrator
An IP appointed by the court under an administration order or by a floating charge holder or by the company or its directors filing the requisite notice at court.

Annulment
Cancellation.

Assets
Anything that belongs to the debtor that may be used to pay his/her debts.

Bankruptcy restrictions order or undertaking
A procedure will be introduced on 1 April 2004 whereby a bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them or give an undertaking to the Secretary of State which will mean that bankruptcy restrictions continue to apply after discharge for a period of between two to fifteen years.

Charge
Security interest taken over property by a creditor to protect against non-payment of a debt (such as a mortgage).

Company Directors Disqualification Act 1986
An Act of Parliament about the disqualification of directors.

Compulsory liquidation
Winding up of a company after a petition to the court, usually by a creditor.

Contributory
Every person liable to contribute to the assets of a company if it is wound up. In most cases this means shareholders who have not paid for their shares in full.

Creditor
Someone owed money by a bankrupt or company.

Debenture
A document in writing, usually under seal, issued as evidence of a debt or the granting of security for a loan of a fixed sum at interest (or both). The term is often used in relation to loans (usually from banks) secured by charges, including floating charges, over companies' assets.

Director
A person who conducts the affairs of a company.

Disqualification
A procedure whereby a person has a court order made against them or gives an undertaking to the Secretary of State which makes it an offence for that person to be involved in the management or directorship of a company for the period specified in the order (unless leave has been granted by the court).

Dividend
Any sum distributed to unsecured creditors in an insolvency.

Fixed charge
A charge held over specific assets. The debtor cannot sell the assets without the consent of the secured creditor or repaying the amount secured by the charge.

Floating charge
A charge held over general assets of a company. The assets may change (such as stock) and the company can use the assets without the consent of the secured creditor until the charge "crystallises" (becomes fixed). Crystallisation occurs on the appointment of an administrative receiver, on the presentation of a winding-up petition or as otherwise provided for in the document creating the charge.

Guarantee
An agreement to pay a debt owed by a third party. It must be evidenced in writing for it to be enforceable.

Liquidation (winding up)
Applies to companies or partnerships. It involves the realisation and distribution of the assets and usually the closing down of the business. There are three types of liquidation - compulsory, creditors' voluntary and members' voluntary.

Liquidator
The Official Receiver or an insolvency practitioner appointed to administer the liquidation of a company or partnership.

Member (of a company)
A person who has agreed to be, and is registered as, a member, such as a shareholder of a limited company.

Nominee
An IP who carries out the preparatory work for a voluntary arrangement, before its implementation.

Officer (of a company)
A director, manager or secretary of a company.

Official Receiver
An officer of the court and civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory company liquidations.

Person
An individual or corporation.

Petition
A formal application made to a court. 

Preferential creditor
A creditor who is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. These creditors include occupational pension schemes and employees.

Proof of debt
A statutory form completed by a creditor in a compulsory liquidation to state how much is claimed. The form is supplied by the Liquidator.

Provisional liquidator
OR/IP appointed to preserve a company's assets pending the hearing of a winding up petition.

Proxy
Instead of attending a meeting, a person can appoint someone to go and vote in their place - a 'proxy'.

Proxy form
Form that must be completed if a creditor wishes someone else to represent him or her at a creditors' meeting and vote on his or her behalf.

Public examination
When a company is being wound up or in bankruptcy proceedings, the Official Receiver may at any time apply to the court to question the company's director(s) or any other person who has taken part in the promotion, formation or management of the company or the bankrupt.

Realise
Realising an asset means selling it or disposing of it to raise money, for example to sell an insolvent's assets and obtain the proceeds.

Receiver
The commonly used name for an administrative receiver. The term can also mean a person appointed by the court or with the power to receive the rents and profits of property. Receivers who are not administrative receivers do not need to be insolvency practitioners.

Receivership
A company in administrative receivership is often said to be "in receivership".

Rescission
A procedure that cancels a winding-up order.

Release
The process by which the Official Receiver or an insolvency practitioner is discharged from the 
liabilities of office as trustee/liquidator or administrator.

Secretary of State
The Secretary of State for the Department of Trade and Industry

Secured creditor
A creditor who holds security, such as a mortgage, over a person's assets for money owed.

Shadow director
A person who, without being formally appointed, gives instructions on which the directors of a company are accustomed to act.

Statement of affairs
A document sworn under oath, completed by a bankrupt, company officer or director(s), stating the assets and giving details of debts and creditors.

Supervisor
An IP appointed to supervise the carrying out of a company voluntary arrangement. 

UNCITRAL
United Nations Commission on International Trade Law.

Unsecured creditor
A creditor who does not hold security (such as a mortgage) for money owed. Some unsecured creditors may also be preferential creditors.

Voluntary liquidation
A method of liquidation not involving the courts or the Official Receiver. There are 2 types of voluntary liquidation - members' voluntary liquidation for solvent companies and creditors' voluntary liquidation for insolvent companies.

Winding up order
Order of a court, usually based on a creditor's petition, for the compulsory winding up or liquidation of a company or partnership.

8. Data Protection Act 1998 - How we collect and use information 

The Official Receiver is the Data Controller for the purposes of the above Act.

The Official Receiver collects information about you for the purposes of discharging his statutory functions in relation to the liquidation of a company of which you are or have been a director. The Official Receiver may check information provided by you, or information about you provided by a third party, with other information held by him. He may also get information about you from certain third parties, or give information to them, to check the accuracy of information, to prevent or detect crime or to carry out his statutory duties. 

He will not disclose information about you to anyone outside The Insolvency Service unless the law permits him to do so.

Individuals are entitled to know what information the Official Receiver/Insolvency Service holds about them on computer and in paper files which are part of a relevant filing system. We are not however required to disclose information to you which would be likely to prejudice the proper discharge of functions by the Official Receiver designed for protecting members of the public against financial loss due to dishonesty, malpractice or similar improper conduct by, or the unfitness or incompetence of, persons concerned in the management of companies. 

Most of the information about you held by the Official Receiver will primarily have been obtained from you by way of the questionnaire that you completed and statements you made to the Official Receiver in relation to the liquidation or from information held by the Registrar of Companies. You will, of course, know this information already but you will be able to check its accuracy if you wish to do so. 

If you want to know more about what information is held about you, or the purposes for which it is held, you should contact the Data Protection Liaison Officer (DPLO) at the Official Receiver's office which dealt with the liquidation. The DPLO will write to you with full details of the type of information that you can be provided with. He will also give you a standard data request form to complete and return with appropriate forms of identification. On receiving the completed request form, the DPLO has 40 days to deal with your request. When you get the information, if you discover that it is inaccurate and/or incorrect you should, in the first instance, write to the DPLO with full details.

Further information about the Data Protection Act 1998 can be obtained from the Information Commissioner at Wycliffe House, Water Lane, Wilmslow, Cheshire SK9 5AF (Tel: 01625 545 700) Internet: www.dataprotection.gov.uk

 

© Crown copyright 2005
The material featured on this page is subject to Crown copyright protection unless otherwise indicated and has been provided by The Insolvency Service.
Published October 2005

You should seek appropriate advice before acting on any information contained on this page.