We run through the most frequently asked questions posed by Directors when their business is at risk of insolvency.
As a director, you are under a duty to act in the best interests of your company and its shareholders. However, the moment your company is deemed to become insolvent, you are under a legal duty to protect the interests of your creditors. Going forward, the primary purpose of the company and its directors must be achieving the best return for creditors.
• It is essential to maintain accurate and up to date books and records, including minutes of company meetings to document the decisions and views of the board and individual directors.
• You should properly establish the reasons for the financial difficulties of the business and consider your future business strategy for the company.
• Do not continue to trade / incur additional liabilities when the company is insolvent unless you can realistically and genuinely believe you can trade your way back to solvency. Document your decisions and where appropriate, take professional legal advice and consult an Insolvency Practitioner.
• Do not take deposits for orders which you know you are unable to fulfil.
• Do not pay one creditor to the detriment of the general body of creditors.
• Do not incur further credit or issue cheques when you know there is little or no prospect that you can honour those commitments.
• Ensure you receive the true market value for any assets sold by the company. Obtaining an Independent valuation is strongly advised prior to concluding a sale. Should you intend to sell any of the assets to an officer of the company, consult an Insolvency Practitioner prior to the transaction.
What are my duties as a company director in liquidation and when do they cease?
Directors’ duties cease at the date of liquidation, although the director’s full ongoing co-operation and assistance is required by the Liquidator. The company’s directors must:
• Give the Liquidator information about the company’s affairs
• Provide details of its assets and liabilities
• Preserve and hand over the company’s assets to the Liquidator; and
• Preserve and hand over the company’s books, records, bank statements, insurance policies and other papers relating to its assets and liabilities.
When can I be held personally liable for the company’s debts?
• Personal Guarantees – a limited company is a separate corporate entity and the main advantage for directors and shareholders is that they are not personally liable for the company’s debts and liabilities. However, if you have signed a personal guarantee in favour of a creditor, you could be called upon to pay any shortfall, up to the limit of the guarantee plus interest. Engage with the creditor(s) early and regularly to open negotiations. Consideration should be given to maximising the sum obtained for secured assets prior to insolvency, although only after seeking advice from an Insolvency Practitioner.
• A compensation process is being introduced to provide better financial redress for the loss which creditors have suffered as the result of the conduct of disqualified directors. A disqualified director can in future be required by the Court to pay compensation to creditors who have lost out financially for unfit conduct which occurs after 1 October 2015.
• Wrongful trading – Wrongful trading occurs where the directors of a company (or shadow director – someone who is not a named director but who directs or controls the company) continue to trade when they knew, or should have realised that there was no reasonable prospect of the company avoiding insolvent liquidation and the company then goes into liquidation. If a Liquidator suspects that this has occurred, he may apply to court for an order asking that the directors contribute to the company’s assets. Unless you can prove that you took every step to minimise the potential loss to creditors, the Court may decide you have been wrongfully trading and it can order you personally to make a contribution to the company without financial limit.
• The Small Business, Enterprise and Employment Act 2015 (SBEE) gives Administrators the same powers as Liquidators to bring claims in such circumstances. The commencement date for such powers is awaited.
• Fraudulent Trading – this is where you have carried on business with the intention to defraud creditors or for any other fraudulent purpose. Examples of which would include, taking deposits for orders that you know you can’t fulfil, or entering into contracts where you don’t have sufficient funds to complete the undertaking, giving wrong, inaccurate or false information with the general intention to deceive. If proved by the Court, then you can be personally liable to make a contribution to the Court, without financial limit. You can also be imprisoned for up to 10 years, or fined, or both.
• Under the SBEE Act, Insolvency Practitioners in due course will also be able to assign claims for wrongful and fraudulent trading, preferences and transactions at under value to third parties. This could lead to more claims being made and consequently more Directors being called to account.
• Misfeasance – this is where a breach of your legal fiduciary duties as a director has taken place. For example, money improperly withdrawn from a company or misappropriation of company funds for purposes not consistent with the business. On application by the Liquidator, the Court can compel the directors to repay, restore or account for the money or property, or contribute without financial limit such sums to the company’s assets by way of compensation, if the Court so directs.
• Unfair Preferences – you cannot make payments, or transfer assets to one creditor in preference to another. For example;
o paying one or more creditors who are threatening legal action, including the Bank and HMRC
o repaying family or friends
o repaying your own director’s loan account
o actions to avoid liability under a personal guarantee
All creditors must be treated equally when the company is insolvent. The Court can set aside such transactions and order you or the benefactor to return the asset or repay the funds.
• Transactions at under value – generally where ownership of an asset has been transferred for less than the market value. The Court can set aside the transaction if it decides that a transfer at under value has taken place. The new owners can be asked to restore the asset(s) in question to the company.
Directors are advised to seek legal advice if they believe the circumstances, as set out above, may apply to them.
After liquidation, can I still be a company director?
Yes, it is possible for you to continue to be a company director. The fact the company is in liquidation does not automatically disqualify you. The Liquidator is obligated by statute to prepare a report under the Company Directors’ Disqualification Act 1986 on the conduct of every person who is or was a director or shadow director, at any time in the three year period prior to insolvency. It could lead to disqualification as a director in future.
Can I start up a new limited company immediately?
Yes, it is possible for a director to set up a new company although there may be some restrictions put in place by HM Revenue & Customs.
Will I have to face the company’s creditors?
If there is an insolvent liquidation, then a meeting of creditors must be convened. In a creditor’s voluntary liquidation, a director is required by statute to attend and chair the Meeting of Creditors, however in a Court liquidation this is at the discretion of the interim Liquidator.
Will the Liquidator review my actions as a director of the company?
The Liquidator is required by statute to submit a report to the Secretary of State on the conduct of every person who is, or was a director or shadow director, at any time in the three years prior to insolvency. It could lead to disqualification as a director in future. The report details if the Liquidator believes that the director’s conduct makes him unfit to be concerned in the management of a company. If a disqualification order is made, the minimum period of disqualification is two years and the maximum is fifteen years.
As a director can I purchase company assets?
A director may personally purchase company assets from the company or the Liquidator, provided an independent valuation has been obtained to justify the sum paid.
Do the directors of a company subject to a liquidation need to file annual accounts and annual returns?
Once a company goes into liquidation and the statutory liquidation documents are registered at Companies House, there is no need to file annual accounts and annual returns. However, until Companies House receives notification that the liquidation has commenced the annual accounts and annual returns will still be deemed to be due.
Can I resign as a director of an insolvent company?
Yes, you can resign as a director, however your obligations to the Liquidator to co-operate will continue. As you were a director of the company in the three year period prior to liquidation, the Liquidator will still include you in his statutory director’s disqualification report to the Secretary of State.
Can we start again using the same or a similar name to the company in liquidation?
No. Any individual who has been a director of a company in the 12 months prior to liquidation is prohibited for five years from starting up a company using the same or a similar name. The exceptions are;
• With the leave of the Court.
• By informing all creditors in writing and in an advertisement in the Edinburgh Gazette
• Where you have previously registered a company with a similar name, which has been in existence for more than 12 months prior to liquidation.
This fact sheet sets out some of the more common questions raised by Directors in such circumstances. It is not intended to be exhaustive or comprehensive guide to Director’s responsibilities under the Companies Acts, Insolvency legislation or the law relating to it.
Directors are strongly advised to seek independent legal advice and speak to an Insolvency Practitioner.
Contact details for assistance:
Head of Business Recovery and Insolvency
3 Castle Court, Carnegie Campus
(Work) +44 (0)1383 628800