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Corporate FAQ's

The company is insolvent – what are the directors’ options?

Quite often, directors, who have often invested a lot of their own money into a business, tell us that the company has “turned the corner” but is too weighed down by its old liabilities.

The first question that you should ask yourself - “is the business itself viable?” In other words, if you could “park” the historic debt to one side for a moment, could the company operate profitably and generate sufficient cash to pay its ongoing creditors?

If the underlying business of the company is sound but it is technically insolvent either on a cash flow or balance sheet basis, it is often possible to restructure the company in such a way as to protect the core business.

Protection, by way of a legal moratorium against creditor enforcement action, is first achieved by placing the company into a secure environment where the losses of the past are not allowed to drag down the business i.e. by either placing the company into Administration [a very quick and relatively inexpensive procedure nowadays] or seeking creditor and shareholder approval to a company voluntary arrangement [CVA]. Both options need a well thought out and achievable business plan which eventually will need to put to the company’s creditors for their approval.

Invariably, the plan will provide for payments to historic creditors over several years out of the future profitability of the company, a profitability that would be impossible if the company did not have the ability to “ring fence” the old debts

The two procedures also lend themselves to situations where a sale of the company’s assets [including goodwill] is the best way forward for the business and the creditors and all the other stakeholders [i.e. bank, employees and customers] as sales of assets on an ongoing basis, free of historic debt, bring better returns to creditors and preserve livelihoods.

If the underlying viability is no longer there, the directors need to take prompt action to preserve the assets of the company [directors are after all custodians of such assets for the benefit of the creditors] and take the most appropriate steps to ensure that the company’s affairs are wound up in a proper manner.

A CVL [Creditors’ Voluntary Liquidation] is usually the best course of action in such circumstances as it relatively quickly ensures that a Licensed Insolvency Practitioner can take control and in his capacity as Liquidator can dispose of assets and account to the creditors and shareholders.

What are the consequences of being a director of a company in liquidation/administration?

Well the good news is that there is no legal bar on you continuing to act as a director of another limited company and because of the nature of “limited liability”; you personally do not have to pay back the creditors.

The bad news is that in a liquidation, action could be taken against you for Wrongful Trading which could result in you having to pay money into the Liquidation pot for the benefit of the creditors. Any personal guarantees that you have given will be called and you will have to make arrangements with such guarantee creditors to repay the monies back [and beware, interest will continue to run on such liabilities].

What you will not be able to do is to act as a director for the next five years, of another company with a similar name without the court's permission – an attempt to reduce the incidence of the 'Phoenix' syndrome.

What are my chances of being disqualified as a director?

We would not wish to give any impression of trivialising this issue, but in reality the chances of being disqualified are slim. The numbers of directors who are disqualified are relatively small given the number of corporate failures; however, quite rightly, disqualification remains a powerful tool against those who abuse the privilege of limited liability.

Directors who have allowed their company to take substantial deposits from customers and then not provide the goods or services are an obvious target for the Secretary of State. Similarly, anecdotal evidence would suggest that directors involved in their third or fourth corporate failure may well [and some may say justifiably] find themselves in the firing line.

Quite often, rather than seek a prosecution through the court, the BERR will seek to obtain an undertaking from the director which has the same effect as a disqualification order.

The minimum period of disqualification is 2 years and the maximum 15 years.

A disqualification order or undertaking does not stop you from having a job with a company, but unless you have court permission it does stop you from:

  • being a director of a company;
  • acting as receiver of a company's property;
  • being concerned in or taking part in the promotion, formation or management of a company

The order or undertaking does not stop you carrying on business as a sole trader or in partnership with others but, unless you have court permission, you must not be a member of or be concerned or take part in the promotion, formation or management of a limited liability partnership. Contravening the order or undertaking is a criminal offence with a possible jail sentence for up to 2 years and a fine.

What is Wrongful Trading and how do I as a director protect myself?

It is a civil liability imposed on directors who allowed their company to continue trading when they knew or ought to have known that there was no prospect of meeting the company liabilities as they fell due. An action for wrongful trading can only be commenced by a Liquidator after a company has gone into insolvent liquidation.

A successful Wrongful Trading prosecution can result in a financial order against a director for the payment of monies to the company.

In order to minimise the risk of a prosecution for Wrongful Trading a director should at all times act in good faith towards all parties and where possible take early professional advice.

A director should not:

  • Assume that the solvency or otherwise of the company is simply the Finance Director’s responsibility
  • Only look at or ask for the company’s accounts at year end
  • Ignore the warning signs of creditor "payment chasing" letters, demands and CCJs
  • Turning a blind eye and hope that everything will work out ok in the end

A director should:

  • Ensure that the company has proper accounting and reporting systems in place
  • Review management accounts on a regular basis
  • Minute all major commercial decisions.
  • Take professional advice and act upon it
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