One of the biggest myths in business is that liquidating a company means you cannot be a director again. This simply is not the case. In the UK, the law recognizes that businesses fail for all sorts of reasons, from market shifts to sudden economic changes. Liquidating an insolvent company is often the most responsible thing you can do, and it does not automatically stop you from starting a new venture immediately.
The short answer is no. There is no automatic disqualification following a standard insolvent liquidation, such as a Creditors’ Voluntary Liquidation (CVL). You are free to be a director of as many companies as you like.
You only face a director’s ban if the Insolvency Service investigates your conduct and finds evidence of unfit behavior. This usually involves things like fraud, taking credit when you knew the company had no way of paying its creditors, taking deposits for work you cannot do, or deliberately hiding assets. For the vast majority of directors who have simply run into severe financial trouble, you are perfectly free to carry on.
While you are free to trade, you must know the rules around prohibited names. This is known as Section 216 of the Insolvency Act. The law wants to stop directors from dumping their debts one day and reopening the next with the same name, which can confuse creditors.
For five years after the liquidation, you cannot use the exact name of the old company, any trading name it used, or any name so similar that it suggests an association. To reuse a name legally, you must meet one of three specific criteria:
Even though you are legally allowed to start again, a previous liquidation is recorded by companies house and so you will need to manage that.
The Taxman has a long memory. If your old company owed HMRC a significant amount of money, particularly for VAT, they may view your new company as a high risk. HMRC has the power to demand an upfront VAT Security Deposit. This is essentially a cash bond that you must pay before they allow the new business to register. If you do not pay this bond when requested, it is a criminal offense to continue trading.
Getting a loan for the new company can be a bit harder after a liquidation. Some lenders may demand higher interest if their checks show a connection to a recently liquidated company. If they do offer finance, they may demand personal guarantees. That said almost all lending these days to new companies require personal guarantees.
Suppliers may be wary of offering credit accounts initially. You should expect to deal with pro-forma invoices, where you pay upfront, until you have rebuilt a track record. Furthermore, if you want to use equipment or customer lists from the old company, you must have them professionally valued and pay a fair market price to the liquidator. You cannot simply move assets from one company to another for free.
Liquidation is a process to deal with a company that just didn’t work out and ran up unmanageable debts. It is not a life sentence for your career. You can start again and build a successful business.
If you are worried about your future as a director or need help managing a liquidation properly, call us on 0333 091 6679. We will give you a straight answer on where you stand.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT Accountants & Business Advisors. Prior to being acquired by RMT his company KSA Group has undertaken more than 300 CVA led rescues. Read our case studies to see how.
