In this post, we’ll go over what happens to a company director of a dissolved company, as well as how the conditions differ from those in liquidation cases involving creditors.
Dissolution of a company, often known as ‘striking off’ a business, is rather common. The government reports that approximately 400,000 businesses were liquidated between 2020 and 2021.
Let’s take a look at what happens to a director of a dissolved company; first, let’s define dissolution and liquidation.
What is a Dissolved Company?
Dissolving a company entails deleting its entry from the official register at Companies House, so ceasing to be a legal entity.
There are numerous reasons why a company may be voluntarily dissolved. The directors may all want to retire, or the company may no longer be needed due to outstanding company debts, for instance.
So What Happens to Directors of a Dissolved Company?
If a company is properly and legally liquidated in compliance with the Companies Act 2006 regulations, its directors may go on to become directors in other limited companies.
The only exception is in cases where there has been misconduct, which we will cover momentarily.
When thinking about what happens to a director of a dissolved company, one factor is particularly important. Dissolving a business eliminates the ability to claim director redundancy pay.
Limited companies can only be dissolved if they are solvent. As a result, an insolvent business facing financial difficulties might consider a CVL or company voluntary arrangement (CVA) with the help of an insolvency practitioner.
Unfit behaviour and disqualification
Last year, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act was passed to address the issues faced by creditors.
This legislation grants the Insolvency Service the authority to investigate directors of dissolved firms if there are questions about potential unfit conduct.
If proof of inappropriate behaviour is discovered, company directors of dissolved companies may be disqualified for up to 15 years and barred from becoming directors elsewhere.
After liquidation, what happens to the directors?
Here’s how the situation compares for directors after liquidation compared to directors of dissolved corporations.
In the case of mandatory liquidations in particular, directors are investigated to see if they fulfilled their duty by managing the firm without negatively impacting its finances.
Same as before, proof of director misconduct could result in disqualification and make them personally liable for company debts.
Directors can claim redundancy pay when a company is liquidated rather than dissolved. Dismissal for unfit conduct does not constitute redundancy.
The amount of redundancy pay is based on:
- Age
- Pay rate:
- Service length (up to 20 years)
The maximum statutory redundancy pay is set at £16,320 as of April 6, 2021.
Members’ voluntary liquidation (MVL) is an alternative to closing up a solvent company. It is a tax-efficient method of extracting revenues; however, redundancy compensation cannot be recovered following the dissolution of a solvent business.
Conclusion
Directors of dissolved companies can later take up a similar position at another company unless there is proof of misconduct that leads to disqualification.
Dissolution is only for companies that are solvent and do not have outstanding debts to creditors. An insolvent company suffering financial difficulties may consider a CVL or CVA.
Redundancy pay cannot be claimed when a business is dissolved, but it can be claimed following a company dissolution.
Please do not hesitate to get in touch with us if you have any questions about what happens to directors of dissolved companies.
