Company Insolvency Myths Uncovered

When it comes to insolvency, there are many myths and misconceptions which often lead to confusion and ill-informed actions. It is important that the myths surrounding insolvency and insolvency practitioners are addressed so that more people can understand some of the protocols involved. As a result, we have compiled a list of some of the more common myths we have encountered regarding insolvency:

Insolvency Practitioners are on the Directors side as they are the ones paying their fees

Whilst it may appear that way, this is not the case. Insolvency practitioners work on ensuring a non-bias to any parties involved with the company. They are paid from the assets of the company.

Being a director of a company that is insolvent will stop me from being a director of another company?

This is not automatically true. The reasons as to why the previous company became insolvent is the deciding factor on whether you can be a director of another company. For example, during the director investigations you are cleared of any wrongdoing then there is no reason as to why you cannot go on to be a director of another company.

However, if you are found to have performed misconduct while trading an insolvent company, then a ban can be implemented by the Secretary of State for up to a maximum of 15 years.

If I put my company into a Pre-pack Administration, I can buy it back cheap without its debts and creditors?

A Pre-pack Administration is a process which allows for continuous trade of a company despite entering into the Administration process. It is not a cheaper route for the director or for another party to purchase the company and its assets. A fair price must be sought out otherwise it could be claimed that the assets are being undervalued. In order to achieve this, an independent valuation of the business and assets must be sought from a reputable firm.

Should I be found guilty of misconduct will I go to prison?

Imprisonment is only going to feasibly occur in the most severe cases of wrong-doing.

In the most common cases of misconduct, the action against a director proved guilty is to receive a ban from acquiring future roles as a director within another company. This ban can reach up to 15 years however this again appears to be reserved for the most severe of cases.

I can pay off some creditors before others as I promised them their payment first

In the lead up to a company closure, if a creditor is paid in priority to another creditor when it could be seen that they were a newer or less overdue debt then the Liquidator will need to look at these transactions. In order for a preference to be proved against the creditor and the payments recovered from the creditor then the Liquidator will need to show that the payment was made to purposely put the creditor in a better position.

It may prove difficult to gather enough evidence to show this. However, if the preference payment is to a connected party then the “on purpose” part of the proof is assumed and so a payment can be more easily reversed.

Banks will never lend me money ever again after liquidation

This cannot be the general assumption as banks will assess each situation individually. Whilst it is down to the discretion of the banks, liquidation should not prohibit you from borrowing money. However it is important to understand that different banks have their own policies regarding whether they will fund a “phoenix” as they call it. The reality is, it is common practice to have a few weeks’ notice before a decision is taken to liquidate a company and a new bank account is set up before the liquidation commences.

I will lose my home and personal assets if I enter liquidation

As long as no personal guarantees were given to any creditors then your personal assets will not be affected by the liquidation process. However, if personal guarantees were made, it will depend on the amount owed to determine whether or not personal assets will be used for payment.

It should be remembered that a lender should normally take first security against the company assets before a personal guarantee is pursued.

Insolvency will hurt my credit rating

Entering into a corporate insolvency will not affect your personal credit rating. With a personal bankruptcy, the insolvency information will unfortunately be on your credit report for up to 6 years.

Everyone will see I have filed for insolvency due to the public advertising

The only editorial in which insolvency and liquidations are advertised is called the London Gazette. As this paper is solely for the use of advertising such information, it is not read much, if at all by the public. Therefore, you should not worry about others reading about your financial situation.

If you are concerned about your insolvency becoming common knowledge, this is most likely to happen through word-of-mouth and therefore cannot be controlled. Though be aware that from time to time a local paper may pick up on a closure by word of mouth and choose to publish a public interest story particularly if a high number of employees have lost their jobs.

Please remember that myths are often fact based but remember one important factor and that is there are exceptions to all rules.

About Irwin Insolvency

Many businesses face financial challenges. If debts are building up and no matter what you do the situation seems to get worse, it can be difficult to know how to cope or where to turn for help.

At Irwin Insolvency, we have a personal understanding to sympathise with your financial situation. With our many years of experience, we will be able to provide you with advice and guidance no matter what financial situation you are in.

To speak to a member of our friendly team, please call us on 0800 009 3173.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.