Walking away from a company without fulfilling your obligations can have legal and financial implications. It is simply not wise to cease trading your company and ignore your creditors and obligations. It is also important to take the right steps when you are one of a number of directors and you want out. Your actions or inaction can come back to bite you. Here are some risks to consider and why the option of a formal liquidation may be worthwhile considering particularly if your company is struggling or no longer viable.
The Risks for a Director
Breach of Fiduciary Duty: Directors owe fiduciary duties to the company and its shareholders. These duties include acting in the best interest of the company, exercising due care and diligence, and avoiding conflicts of interest. By abandoning the company without proper transition or fulfilling your obligations, you may be seen as breaching your fiduciary duties.
Legal Consequences: Resigning as a director does not automatically absolve you of your legal responsibilities. If your actions or negligence during your tenure as a director result in harm to the company, its shareholders, or other stakeholders, you may still be held legally accountable. This can include potential legal claims and liability. Any claim would likely be limited to the period up to your exit.
Regulatory Compliance: Directors have responsibilities to ensure compliance with various laws and regulations. Walking away without ensuring that the company continues to meet its regulatory obligations, such as filing tax returns, financial statements, or maintaining licenses, can result in penalties and legal consequences for the company and its remaining directors.
Reputational Damage: Resigning abruptly and leaving the company in a difficult situation can harm your professional reputation. Future business prospects may be negatively affected if potential partners or employers view your actions as irresponsible or unethical.
Steps to protect you/the company
If you intend to resign as a director, it is important to follow the proper process and take necessary steps to protect yourself and the company:
Review Company Documents: Thoroughly review the company's constitution, shareholder agreements, and any relevant contractual obligations to understand the resignation procedure and any specific requirements.
Inform the Board and Shareholders: Provide written notice of your resignation to the board of directors and shareholders. This notice should be in accordance with the company's constitution and any legal requirements.
Fulfil Duties and Obligations: Prior to resigning, ensure that you fulfil your duties as a director, such as completing ongoing projects, handing over necessary information to the remaining directors, and assisting in the smooth transition of responsibilities.
Seek Professional Advice: Consider consulting with a lawyer who specializes in corporate law to ensure that you comply with all legal obligations and minimize potential risks.
Resigning as a director should be done in a responsible and ethical manner, keeping the best interests of the company and its stakeholders in mind. It is always recommended to seek legal advice specific to your situation to fully understand your obligations and protect your interests.
Formal Liquidation
Winding up a company through a formal liquidation process can be a better option in certain circumstances compared to simply resigning and walking away. Advancing a liquidation is a straightforward process where the shareholders are in agreement that the company is no longer viable and it is time to wind up the company. Here are some reasons why formal liquidation may be preferable:
Orderly Distribution of Assets: Formal liquidation ensures that the company's assets are distributed in an orderly and transparent manner. A liquidator, appointed to oversee the process, will identify and sell the company's assets to maximize the return for creditors and shareholders. This can provide a fair and equitable distribution of assets among stakeholders.
Clearing Debts and Obligations: Liquidation allows for the orderly resolution of the company's outstanding debts and obligations. The liquidator will assess and address creditor claims according to their priority, following the established legal framework. This process can provide closure and legal protection against future claims for the company and its directors.
Legal Protection for Directors: By opting for formal liquidation, directors can obtain legal protection from potential personal liability for future debts that may arise after the completion of the liquidation process and strike off of the company. This is on the basis that the liquidators have given pubic notice and called for claims.
Regulatory Compliance: Liquidating a company through a formal process ensures compliance with legal and regulatory requirements. The liquidator will handle the necessary paperwork, tax filings, and notifications to government agencies, relieving the directors of these administrative burdens.
Closure and Finality: Liquidation provides a definitive end to the company's operations. It allows for the closure of the business in an official and recognized manner, giving certainty to stakeholders and facilitating the transition to other endeavours. Once a company is struck off it is not an easy task to restore. There must be strong argument for the Registrar of Companies to consider reinstatement and the legal cost involved is not small.
It's important to note that the decision to wind up a company through formal liquidation should be made after careful consideration of the company's financial situation, the preferences of shareholders, and the advice of legal and financial professionals. It is recommended to seek expert guidance specific to your circumstances to fully understand the implications and make an informed decision. If you would like to discuss your options with our team contact us here.