When a company enters liquidation, directors often face difficult questions about their role and responsibilities. One question we get asked frequently here at Bridgewood is whether a director can resign during the liquidation process.
While it’s technically possible, the implications are complex, especially in insolvency contexts. Lead Consultant and Founder, Robin, looks at the legal rights, limitations, and consequences of resigning as a director during company liquidation.
Legal Framework and Resignation Rights
Under the Companies Act 2006, directors generally have the right to resign at any time, subject to the terms of the company’s articles of association and any existing contractual obligations. This right reflects the foundational principle that no individual can be compelled to serve as a company officer against their will.
Its vital to distinguish between the statutory right to resign, and any contractual obligations that might still bind the director post-resignation. For instance, service contracts might include notice periods or restrictive covenants that remain enforceable even after the resignation has taken effect.
This right remains intact regardless of the company’s financial health. However, the practical and legal consequences can differ significantly depending on whether the company is solvent or insolvent.
In solvent companies, resignation is usually a simple bit of admin. Particularly during formal liquidation, resignation intersects with regulatory oversight, fiduciary duties, and potential investigations.
Resignation During Different Liquidation Stages
The timing of a director’s resignation in relation to liquidation proceedings can significantly affect the validity of the resignation and the director’s ongoing responsibilities and liabilities.
Directors may choose to resign before formal insolvency proceedings commence. While this is perfectly legal, it doesn’t absolve the director from liability for actions taken while still in office, particularly if the company was already insolvent or approaching insolvency. In fact, resigning at this stage may attract scrutiny, especially if it looks like the director is trying to distance themselves from any impending financial distress or creditor claims.
Resignation During Voluntary Liquidation Process
In a creditors’ voluntary liquidation (CVL), the resignation of a director is possible but often discouraged until certain formal steps are completed.
Whilst a director retains the right to resign, with the company in liquidation it would be for the Liquidator to submit the TM01 to Companies House. The Liquidator may choose not to do this if, for example, the resignation would result in there being no directors appointed, since a company must always have at least one appointed director, even when in liquidation.
Directors are typically expected to assist in preparing the statement of affairs, call the necessary meetings, and cooperate with the appointed insolvency practitioner.
Resigning early during this phase can hinder the process and can even lead to further scrutiny by the liquidator or creditors.
Resignation During Compulsory Liquidation Proceedings
Once a winding-up petition has been presented, the company’s affairs become subject to court oversight. Although directors retain their office until an official liquidation order is made, resigning during this period can raise concerns about obstruction or non-cooperation. After the winding-up order is granted, the liquidator assumes control, and directors’ powers cease, though their obligations don’t.
The presentation of a winding-up petition doesn’t alone prevent resignation. However, it does signal to the court and stakeholders that insolvency is imminent. Any resignation at this point is likely to be examined in the context of potential wrongful trading or fiduciary breaches.
The closer the resignation occurs to the onset of insolvency, the more likely it is to be scrutinised. Directors who resign just before liquidation may still be subject to inquiries, claims, and disqualification actions if misconduct or mismanagement is alleged.
Legal Requirements for Valid Resignation
While a director might be legally ok to resign, that resignation must comply with formal legal and procedural requirements to be valid and properly recorded.
Most companies’ articles of association set out the formalities required for a director’s resignation. Typically, this involves submitting a written notice of resignation. Although the Companies Act 2006 does not prescribe a mandatory format, compliance with the company’s constitutional documents is essential for the resignation to be legally effective.
Any resignation needs to be formally addressed to the company’s board of directors. The letter should include the date from which the resignation is to take effect and, ideally, be acknowledged at a board meeting. Minutes of the meeting should note the resignation and any related resolutions, such as reallocation of responsibilities.
To complete the process, the company must file a TM01 form with Companies House to officially record the director’s resignation. Although the responsibility for filing lies with the company, resigned directors should ensure this has been done to avoid confusion or continued association with the company on public records.
Minimum Director Requirements and Implications for Sole Directors
If the person resigning is the only director, then the resignation might not be legal unless arrangements are made for a successor. A company has to have at least one natural person as a director. So the sole director resigning without appointing a replacement can lead to administrative and regulatory issues.
Documentation and Record-Keeping Obligations
All relevant documentation, including resignation letters, board minutes, and Companies House filings, should be retained for record-keeping and to demonstrate due process. These documents can be read through by liquidators, creditors, or regulatory bodies, particularly in cases where misconduct is alleged.
Consequences and Liabilities
Resigning as a director during or prior to liquidation doesn’t shield someone from liabilities that were incurred during their time in office. Former directors can remain exposed to legal and financial risks, particularly where misconduct or insolvency mismanagement is suspected.
Ongoing Liabilities Despite Resignation
Resignation doesn’t remove a director’s personal liability for guarantees or debts incurred while they were in office, eg if the director has provided a personal guarantee on a loan or lease, that liability stays regardless of resignation or liquidation.
Under the Insolvency Act 1986, directors can be held personally liable for wrongful trading if they carried on when they knew (or should have known) that avoiding insolvent liquidation is unlikely. A resignation does not get rid of prior conduct, instead it can be used as part of a wrongful trading claim.
Potential Liability for Fraudulent Trading and Transactions at Undervalue
Directors could face liability for fraudulent trading, if an intent to defraud creditors is established. Similarly, involvement in transactions at undervalue or preferences before liquidation can attract legal claims from the liquidator, regardless of whether the director has since resigned.
The Company Directors Disqualification Act 1986 allows for disqualification proceedings to be brought against former directors based on their conduct prior to or during liquidation. Resignation doesn’t stop these investigations and it might even trigger deeper checks.
Antecedent Transaction Investigations by Liquidators
Liquidators are empowered to review transactions leading up to insolvency to determine whether directors breached their duties or acted improperly. Former directors can be required to provide information, justify decisions, and, in some cases, return funds or assets deemed to have been improperly transferred.
Liquidator’s Powers Regarding Former Directors
Even after a director has formally resigned, they still remain within scope of the liquidator’s powers and investigations. Resignation doesn’t remove a director’s responsibilities or the possibility of future claims.
Liquidators are empowered to scrutinise the conduct of directors prior to and during the company’s insolvency. This includes examining whether their decisions contributed to the company’s financial decline or breached their statutory or fiduciary duties.
Under the Insolvency Act 1986, liquidators may compel former directors to provide information and documentation relevant to the company’s affairs. This includes written correspondence, financial records, and explanations of company decisions.
Requirement to Cooperate with Statement of Affairs Preparation
Even if a director has resigned, they may still be required to assist with the preparation of the statement of affairs, which is a detailed summary of the company’s assets and liabilities. Failure to cooperate may lead to formal examination before the court.
Resigned directors must ensure that all company property, records, and access credentials are returned or surrendered to the liquidator ASAP. Delays or refusal can result in legal action and accusations of non-cooperation or obstruction.
Potential for Liquidator to Pursue Claims Against Resigned Directors
If misconduct is identified e.g. trading to the detriment of creditors or misapplying company funds, the liquidator can pursue misfeasance claims (see further down), restitution orders, or seek to recover losses from the resigned director personally. The director’s resignation makes no difference to this.
A director’s fiduciary responsibilities evolve when a company approaches insolvency. These duties can extend beyond resignation and carry significant implications for former directors if breached.
Fiduciary Duties During Insolvency
When a company is insolvent or getting near to it, directors have to shift focus away from running the company for the benefit of shareholders to protecting the interests of creditors. This shift reflects the fact that creditors, not shareholders, become the primary stakeholders in the company’s assets.
Although a director’s active powers end upon resignation, certain duties (particularly those relating to past decisions and transactions) can remain under scrutiny. Courts may examine whether, during the lead-up to insolvency, a director failed to adequately consider creditor interests.
A failure to act in the creditors’ best interests can result in breach of fiduciary duty claims, even after resignation. If a director is found to have caused loss to the company or creditors through poor management, they could be held personally accountable through civil recovery actions brought by the liquidator.
Misfeasance Proceedings Against Former Directors
Under Section 212 of the Insolvency Act 1986, liquidators can initiate misfeasance proceedings for misapplication of company money, breach of duty, or negligence. Former directors remain fully liable for any breaches committed while they held office.
Claims against former directors can often be brought within several years after liquidation begins, depending on the nature of the alleged misconduct. For example, claims for misfeasance or transactions at undervalue typically carry a limitation period of six years, meaning resignation offers no immediate protection against long-term liability.
Practical Considerations and Professional Advice
Resigning as a director during insolvency is not a decision to be taken lightly. Directors need to look carefully at the risks and implications of stepping down under different circumstances.
High-Risk vs. Low-Risk Resignation Scenarios
Resignation during contentious periods, such as immediately before liquidation or while the company is accruing debts, is considered high-risk. In contrast, resignation after transparent cooperation with the insolvency process and with proper documentation is typically lower risk. Timing, transparency, and intent are key things to consider.
Timing the resignation well can help reduce exposure to personal liability, but only when its combined with evidence of good faith and due diligence. Sudden resignation whilst also ignoring known insolvency risks can actually increase liability exposure.
Regulators and liquidators are particularly sensitive to directors who resign in an apparent attempt to evade responsibility. This can backfire, badly, especially if the director is being uncooperative or any misconduct is spotted during investigations.
Resignation During Director Disputes and Deadlocks
In situations where board deadlock or internal disputes arise, resignation can seem like the only option. However, directors should weigh this up against their statutory duties and consider whether stepping down could harm creditors or mess up insolvency efforts.
When multiple directors are involved, one director’s resignation can leave others with full control over critical insolvency decisions. This can affect how events unfold and how responsibility is allocated in post-liquidation investigations.
Before resigning, directors should consider options like Company Voluntary Arrangements (CVAs), administration, or pre-pack sales. These alternatives might offer better outcomes for creditors and reduce personal exposure for directors.
If resignation proceeds, it is essential to conduct a formal and complete handover of all company records, financial data, and access credentials. This not only supports the liquidation process but also shows good faith and cooperation.
Post-Resignation Obligations
Even after stepping down, a former director must remain available to answer questions, provide information, and assist with the liquidator’s investigations into the company’s affairs.
Liquidators have statutory powers to summon former directors for interviews or to provide documentation. Non-compliance can lead to court orders and potentially legal penalties.
Directors must retain or transfer all relevant records upon resignation. Destroying or withholding records can result in serious consequences, including accusations of misfeasance or obstruction.
Dealing with Creditor Inquiries After Resignation
Resigned directors can still be contacted by creditors seeking clarification or resolution. While a former director isn’t forced to provide financial guarantees, they should respond professionally and refer creditors to the appointed liquidator.
Former directors should be prepared for ongoing involvement in the insolvency process, including court proceedings, liquidator reports, or even director disqualification hearings.
Insolvency Practitioner Engagement
Written advice from professionals can be a valuable defence if a director’s actions are questioned at a later date. It shows the director sought guidance and acted in accordance with professional recommendations. So, it’s vital to retain all relevant documents.
Engaging a licensed insolvency practitioner such as Bridgewood provides directors with informed, impartial guidance on whether resignation is appropriate and how best to approach it from a legal and strategic standpoint.
Practitioners can help directors understand their duties, prepare for liquidation, assess risks, and ensure proper procedures are followed. Our help and advice can often make the difference in demonstrating that a director acted responsibly and in good faith.
