If your business is going into liquidation, it can be an incredibly scary time. Suddenly, the future of your business is out of your hands and strangers are going through your financials. For some, it feels like a relief, while for others it feels like a crushing failure. It is a scenario that is never helped by the innumerable fictions that surround the liquidation. So in this guide, we’ll dispel some of those myths and tell you what really happens to a director when his limited company winds up.

First of all, it is key to note that no: liquidation does not mean that you are prohibited from becoming a director of another company. It is a common misunderstanding, but it shows the level of ignorance that floats on the subject of insolvency.

Winding up a limited liability company means that (as the name implies), the directors bear little risk if the company goes bankrupt, as long as they have acted correctly and on time. Failure to do so is defined as failing to act on time, acting responsibly, failing to keep accurate books or records, or continuing to take credit despite knowing your business might not be able to repay it. If that is the case, you would personally be at risk of financial loss, or perhaps worse.

These actions are often described as ‘illicit trading’, and if a reputable settlement expert can prove that illicit trading has taken place, then you, personally, will be at risk. Personal liability for business debts may be attributed and you may be required to pay them.

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

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

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