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  What is a Winding Up Petition?  

What happens to Directors after a company is wound up?

Many shareholders and others with an interest in a company, financial or otherwise, would like to know what happens to directors in the event of a winding up petition. Many believe the directors to be responsible, even though that could be an unfair conclusion to reach. However, not only do the directors of a company served with a winding up petition have obligations in respect of avoiding it, but they will also be under intense scrutiny to determine the reason for it becoming necessary. 

Once a company has received a winding up petition it is crucial that the directors do all they can to prevent it being advertised in the London Gazette (or the Edinburgh Gazette in Scotland). Once it has been so advertise, the directors cannot prevent it coming to Court.

There is not a lot of time, and even if you have paid the creditor after publication the case can come before the Court because another creditor can take the original creditor's place and request that the Court continue it. The responsibility of the directors is to come to a decision as to a course of action after assessing the financial state of the company. What happens to directors could be influenced by the decision they make at this time.

Among their options are:

  • To pay the debt to the petitioning creditor in full (though as explained above, this may not stop the petition), or come to an agreed payment schedule.
  • To contest the petition to the Court, but a spurious contest is not advised. This must be done within 5 days of the hearing date.
  • Placing the company in administration or voluntary liquidation - this cannot be done after publication of the winding up procedure.
  • Doing nothing and letting the process take its course.

Once HM Revenue and Customs find out about the winding up petition, it is normal for them to become involved in the petition and become a party to it, which precludes A, above, being effective in stopping it. It is then highly unlikely that the petition will be dismissed by the Court. The only way then to prevent the petition from winding the company up, given that most other creditors will now join it so as not to be left behind when assets are distributed, would be to meet all debts in full - and that is very unlikely to happen.

What happens to directors now will depend upon a report that the liquidator will likely make after investigating the conduct of the directors. Once a liquidator has been assigned by the Court, he or she will investigate the conduct of the directors prior to and after the publication of the winding up petition.

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The liquidator will decide whether or not the actions of the directors were lawful and responsible, or whether they, or any individual, were involved in unlawful or wrongful trading, misfeasance or of a breach of their fiduciary duties that would possibly enable them to be made personally responsible for the company's debts.  A report is also submitted to the Insolvency Service on the conduct of the directors.  This body may take proceedings to declare any of the directors disqualified from holding further office as a director.

Any of the creditors, including HM Revenue and Customs, or even the receiver or liquidator can make a complaint resulting in this kind of investigation, possibly resulting in charges made against any director under Section 212 of the Insolvency act, 1986, for wrongdoing either before or after publication of the winding up petition in the London or Edinburgh Gazette.

Common forms of misfeasance are directors trying to trade shares, sell company assets below their real value or moving assets from the company after the petition was published. What happens to directors then may be a matter for the courts, but if these actions have been taken irresponsibly, they could be held financially responsible for any subsequent reduction in the worth of the company, and in some cases even for the company being liquidated.

To summarize what happens to directors in the event of winding up petition being made with regard to their company:

  • They (the directors) must attend the office of the liquidator to hand over the company's books, accounts and records,
  • Provide a record of the company's creditors,
  • Provide a list of the company's assets,
  • Provide an explanation as to why the company is in its current position

HM Revenue and Customs can request that the directors be investigated by the Department for Business, Enterprise and Regulatory Reform (BERR) for any instances of wrongdoing such as withholding tax payments, wrongful trading and making undervalued transactions among others.  What happens to directors then is that they can be prosecuted and disqualified from being involved in running a company for up to 15 years and also being personally held responsible for the debts of the company.

If a director has acted lawfully and correctly during the course of the company's lifetime and in particular after the winding up petition was made, then he or she has little to worry about. However, if not, what happens to directors can be dire and personally ruinous in financial terms.  Every director should be aware of their obligations once a winding up petition has been made.


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How to stop a Winding Up Petition
When to use one
How is a Company wound up?
What happens to the directors?
What happens to the Employees?
What is a Pre-Pack Asministration?
Corporate Insolvency


 

 

 
 


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