What Happens To Directors Of A Dissolved Company?January 21, 2022
In this article we’ll run through what happens to a director of a dissolved company, as well as how the circumstances can differ in comparison with liquidation cases.
The dissolution of a company - also known as ‘striking off’ a business - is relatively common. More than 400,000 companies were dissolved between 2020 and 2021 according to the government.
Let’s explore what happens to a director of a dissolved company - but first, it’s important to clear up the difference between dissolution and liquidation.
Defining a dissolved company
Dissolving a business means removing its entry from the official register at Companies House, so that it ceases to be a legal entity.
Crucially, the limited company must be solvent and able to pay its debts. We’ve previously detailed the process for striking off a solvent company.
There are many reasons for dissolving a company. The directors may all want to retire, or the business may no longer be needed, for example.
In contrast, a compulsory or creditors’ voluntary liquidation (CVL) are processes for closing insolvent limited companies.
Directors of dissolved companies
Here’s what happens to a director of a dissolved company.
If a company has been dissolved appropriately and legally, in accordance with Companies Act 2006 legislation, its directors can go on to become directors at other businesses.
The exception to this is where there have been examples of misconduct, which we’ll discuss shortly.
When considering what happens to a director of a dissolved company, it’s important to bear in mind one detail in particular. Dissolving a business takes away the option to make a claim for director redundancy pay.
Only solvent companies can be dissolved. Therefore an insolvent business in financial difficulties should consider a CVL or company voluntary arrangement (CVA) instead.
We’ll explain in more detail what happens to directors after liquidation later on in this article.
Unfit conduct and disqualification
In some cases, companies are not dissolved appropriately and legally. In particular, some directors strike off an insolvent company without going through a liquidation process observed by an official receiver, to hide misconduct likely to cause director disqualification.
To prevent this, last year the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act was passed.
This legislation empowers the Insolvency Service to investigate directors of dissolved companies if there are concerns about possible unfit conduct.
If evidence of misconduct is found, directors of dissolved companies could be disqualified for up to 15 years and banned from being a director elsewhere.
That is, potentially, what happens to a director of a dissolved company if there has been serious wrongdoing, as stipulated by the Company Directors Disqualification Act 1986.
What happens to directors after liquidation?
Here’s how the circumstances compare for directors after liquidation, in contrast to directors of dissolved companies.
In the case of compulsory liquidations especially, directors are investigated to check whether they ran the company in a manner not negatively impacting its finances, as per their duties.
Similar to before, proof of director misconduct may result in disqualification.
In terms of redundancy pay, directors are entitled to claim this when a company has been liquidated, rather than when it has been dissolved. Being dismissed for unfit conduct does not count as redundancy.
The amount of redundancy pay received depends on:
- Rate of pay
- Length of service (up to 20 years)
As of 6 April 2021, the upper limit on statutory redundancy pay is £16,320.
An alternative to striking off a solvent company is a members’ voluntary liquidation (MVL). It’s a tax-efficient way to extract proceeds, just note that redundancy pay cannot be claimed after dissolving a solvent business.
Conclusion: what happens to a director of a dissolved company?
Directors of dissolved companies can subsequently take a similar position at another firm, unless of course any evidence of misconduct is found that leads to disqualification.
Dissolution is for solvent companies only. An insolvent business with financial challenges can consider a CVL or CVA.
It’s not possible to claim redundancy pay after a business is dissolved, whereas it is after a company liquidation.
For more information about what happens to a director of a dissolved company, or for any advice, please don’t hesitate to contact us.