If your business is undergoing liquidation it can be an incredibly scary time. All of a sudden, the future of your business is out of your hands and there are strangers thumbing through your finances. To some, it feels like a relief, whilst to others it feels like crushing failure. It’s a scenario that’s never helped by the countless fictions that surround liquidation. So, in this guide, we’ll dispel some of those myths and tell you what really happens to a director when their limited company goes through liquidation.

Firstly, it’s key to note that no – liquidation does not mean you’re banned from becoming a director of another company. It’s a common misunderstanding, but it shows the level of ignorance that floats around on the subject of insolvency.

Liquidating a limited liability company means that (as the name implies), that the directors face little risk is the company fails, just so long as they have acted properly and acted in time. Failing to do that is defined by failing to act in time, act responsibly, keep accurate books, records or continue to take credit despite knowing that you company could not possibly repay it. If that’s the case, you personally would be at risk of financial loss, or perhaps worse.

These actions are usually described as ‘wrongful trading’, and if an accredited liquidation expert can prove that there was wrongful trading then you, personally, will be at risk. Personal liability can be attributed for company debts, and you could be forced into paying them back.

Otherwise, your risks are extremely limited. They can be limited further by entering voluntary liquidation as soon as possible, if it’s clear that your business has no future. There are plenty of companies out there which will analyse your businesses potential if you can’t see it, but if those tests come back negative, then liquidate as soon as possible.

If the OR finds that directors have knowingly traded whilst insolvent, failed to act, took credit without reasonable prospect of repaying those debts or failed to submit accounts, then you would face personal action? It’s known as “lifting the veil of incorporation” and if it happens, you could be made liable for VAT, PAYE and creditors monies from the time that you should have been aware that the company had no chance of surviving the troubles it has.

However, these actions are rare because the vast majority of company directors are honest and trustworthy business people. If you’re in doubt about any of this, then it’s always best to contact a local specialist.