Irwin & Company,
Insolvency, liquidation and business closure are all very real threats that a company director has to plan for on an on-going basis. The business climate, economy and politics are all unpredictable, now more than ever it seems. As such, a company director needs to seek out the best advice in order to avoid meeting with financial difficulties.
Irwin & Company can give advice on how performance indicators can be incorporated into monthly management reporting systems, and we can assist in the interpretation of management information and action required. Warning signals must never be ignored. Once problem areas have been identified, directors should take appropriate action without delay.
A company director needs access to accurate information. With the right advice, forecasts and the best predictions, they can make informed decisions in the interests of their business. If financial difficulties are unavoidable, then directors should always seek the help of an insolvency practitioner in order to make the best decisions available to them.
A good director needs to understand the role they play within the company and how their actions, or in many cases their lack of action, can produce different outcomes and results in terms of financial success or failure.
The role of a director is much more than being honest, upstanding and acting with the utmost integrity. It means developing an understanding of legal obligations and responsibilities. A breach can give rise to personal liabilities under both civil and criminal law. The law applies to all directors, whether executive or non-executive, full or part-time.
No director can understand the different nuances and complications of the economy and law by themselves. One of the most important steps a director can take is to approach specialists and professionals within a field, such as insolvency practitioners, in order to give themselves the correct tools and information to carry out their role successfully.
If the business is facing financial difficulties, then this is the time a director needs to step up, seek quality advice and find solutions that can either help the company to avoid insolvency or, in extreme circumstances, enter liquidation in the ‘best’ way possible.
As a director, it’s important to know how you can be held personally liable for your actions. A director should understand that their decisions or their inaction could have direct consequences on the business. If a company enters into insolvency, then a director can be personally investigated and held personally liable for a number of their actions.
A company director will not ordinarily be held personally liable for a company’s debts should the business enter into insolvency and be unable to pay its creditors, although the company assets will be liable.
However, a director may be found guilty of fraudulent trading if he knowingly allowed a business to trade with the intent to defraud creditors. This is a criminal offence, punishable by imprisonment, a fine, or both. Under the terms of the Insolvency Acts, fraudulent trading is deemed to be a civil offence. In addition to fraudulent trading and wrongful trading, there is a potential liability for misfeasance broadly described as misconduct or breach of trust involving a misapplication of assets of a business.
If a company enters into insolvency yet continues to trade when it can no longer reasonably pay its debts, the director could be held personally liable for any liabilities. For this reason, a director must stop trading and seek advice if the business is likely to be liquidated. If they are found to have knowingly traded whilst being insolvent, the director may be ordered to pay any debts that are subsequently incurred.
Before this happens, a director could seek a Company Voluntary Arrangement or enter into administration to continue trading and seeking funds to pay off debts, without being held personally liable for debts owed to creditors. It’s the responsibility of the director to act in the best interests of not only their company but any creditors that are owed money, too.
In certain circumstances, a director may have provided personal guarantees to be held against company assets. For example, a director may have secured a loan from the bank, but in order to secure that loan for the company, they were required to use their property or personal assets as security. If the company was then to enter insolvency, those securities could be used to pay off company debts to pay back the debt, making the director personally liable.
If a director has not placed their personal assets as security, then in most cases they would find they don’t have personal liability if they have acted in good faith and in the best interests of the company at all times.
In the event of insolvency, a director needs to be aware that they can face personal disqualification if they are found to have acted against the interests of the business or acted extremely incompetently.
Disqualification means that a person cannot act as a director, or take part in the management of a business for up to a maximum of fifteen years without the permission of the court.
Directors should be aware that disqualifications are rare, but they are a possibility. Directors can be disqualified under the terms of the Company Directors Disqualification Act 1986. This happens if the director is investigated by the Insolvency Service and is found to have been ‘unfit’ for the role. An investigation can occur if a complaint is made against a director or if the Insolvency Company is already investigating a company for its actions.
A director can be disqualified for several reasons, including the following:
If a director is found to be ‘unfit’ and is thence disqualified, they will be subject to criminal proceedings, fines and a possible jail sentence if they break the terms of the disqualification. This not only includes being banned from running a business themselves, but from running a business through a proxy, too.
Because of the potentially severe consequences of disqualification, a director should act in a timely manner with the authorities and fully cooperate if they come under investigation. A director should keep stringent records of their actions and decisions, and seek out the advice of a qualified insolvency practitioner if they face disqualification.
A director is required to always act in the best interests of the company. This includes doing their utmost to prevent the business from entering insolvency and paying any debts owed by the company to creditors.
However, if insolvency has become unavoidable, a director must continue acting in the best interests of both the company and its creditors. To start, a director should seek the advice of an insolvency practitioner. The primary decision to be made at this point is whether to liquidate the company or attempt to enact a recovery.
With professional advice, they can first attempt to find a means to bring the company back from insolvency, in order to allow the business to continue legally trading, employing staff and paying back any debts that are owed. There are several routes a director may decide to take, or indeed that may be taken for them, before a company needs to be liquidated and dissolved entirely.
Liquidation is never in the best interests of anyone. Directors lose their position, employees lose their jobs, and creditors will no longer be paid the money owed to them unless assets can be sold off.
Instead, an insolvency practitioner will suggest that the following options be considered first:
A CVA is the best course of action in many circumstances, as it allows the company directors to continue working in the interests of the company. An arrangement is drawn up with the creditors which sets out a repayment plan for outstanding debts. The company may be restructured, but will be allowed to continue trading even while insolvent.
Administration occurs if the company is placed under the directorship of an insolvency practitioner or creditor. This is another alternative to insolvency but not one in the director’s best interests, as they will be required to step down. Under administration, a company can continue to trade, but under new, temporary direction.
When deciding which route to take, it’s important that all parties concerned discuss the long-term viability of the business. If there is a chance it can be recovered and turned around into a profitable business, then this is the route that needs to be taken.
If however the long-term viability of a company is in doubt, liquidation is the only remaining option. There are two types of liquidation that can occur:
Voluntary liquidation is the best option, as it allows creditors and directors to come to an agreement about which assets should be sold and how the company will be wound down. Compulsory liquidation occurs if the courts force a company to cease trading. This can cause much more disruption to all parties involved, as it’s presumed that no agreements will have been reached in regards to assets and repayments.
If a company enters into insolvency and is set to be liquidated, directors need to be aware that the insolvency practitioner is legally required to compile a report detailing a director’s actions in relation to insolvency.
With the exception of company voluntary arrangements, there is an obligation on the part of the insolvency practitioner to report to the Department for Business, Energy & Industrial Strategy (BEIS) on the conduct of anyone who has been a director or shadow director within the preceding two years. This may lead to disqualification proceedings being brought against one or more of the directors by the BEIS.
Irwin Insolvency has experience working with and advising directors across a wide range of industries in the United Kingdom. Our expert team is able to offer valuable insights, resources and, most importantly of all, expertise.
If a company is facing financial hardship, we offer advice on restructuring, reports on solvency, and options should the business face insolvency. As licensed insolvency practitioners, we also deal with recovery and liquidation options.
Contact Irwin Insolvency today to find out more.