How do director duties change if the business runs out of cash?

What steps should you take if your business goes bust?

If a limited company goes bust, it means that the business has entered insolvency. The directors’ obligations do change, but it doesn’t necessarily mean that the business has to close down.

There may be a range of options open, including formally restructuring the company’s debts under the guidance of a licensed insolvency practitioner (IP). In practical terms insolvency means the business is unable to pay its bills as they fall due, or in some instances its liabilities may exceed the value of its assets.

As soon as insolvency has been reached, however, the company’s directors must cease trading and seek professional insolvency assistance.

A change in director duties

A director’s duties change when their company becomes insolvent. This is to protect company creditors from unnecessary financial loss. Even if directors believe they’re acting in the best interests of creditors by continuing to trade, they could face allegations of wrongful trading by doing so.

In all cases trading must cease, and directors should seek help from a licensed insolvency practitioner. This ensures that creditor interests are prioritised, and reduces the potential for misconduct accusations to be made at a later date.

Professional support to rescue the company

As we mentioned earlier, even when a company is insolvent there may be solutions available to enable it to trade again, albeit in a more streamlined form. A range of debt remedies are available for limited companies, including:

HMRC Time to Pay (TTP) arrangement

The Time to Pay scheme helps businesses to ring fence tax arrears and repay HMRC over an extended period within a new instalment plan. A Time to Pay arrangement typically lasts for 3-6 months, but in some cases HMRC may be agreeable to offering 12 months’ or more extra time. It’s important to contact the tax body quickly, however, to increase the chances of being accepted onto the scheme.

Company Voluntary Arrangement (CVA)

Company Voluntary Arrangements are legally binding agreements that allow an insolvent company to trade away from financial difficulty. Typically lasting between one and five years, CVAs are suitable for companies that are deemed viable for the long-term by a licensed IP.

Alternative funding

If a company is insolvent because it cannot afford to pay its bills as they fall due, alternative funding may be the solution. Invoice finance and asset-based funding are just two examples of alternative finance that offer flexibility to struggling businesses.

Company administration

Company administration provides an eight-week moratorium on creditor legal action, and offers the business time to restructure as necessary. Sometimes a business may be sold out of administration – a process known as pre-pack admin.

If the business has to close down

If a business has gone bust and there’s no chance of rescue, it should be closed down using Creditors’ Voluntary Liquidation (CVL). This is a formal procedure carried out by a licensed IP, who sells the company’s assets at auction for the benefit of creditors.

CVL also enables eligible directors to claim redundancy pay in the same way as their employees. If they’ve worked under a contract of employment for at least two years, and also meet other conditions, directors may be entitled to make a claim. Redundancy payouts can sometimes help to pay for a CVL, repay some of the company’s debt, or indeed, support the director’s personal finances.

Implications for directors of an insolvent company

Directors of an insolvent company face serious sanctions if the business has to close down and it emerges that they failed to fulfil their statutory duties. Sanctions include disqualification for up to 15 years, and being held personally liable for the company’s debts.

When a company is liquidated the office-holder investigates what happened during the time leading up to insolvency, and in particular will look for instances of director misconduct. This can include taking excessive salaries, for instance, concealing assets, or taking unlawful dividends.

If you’re concerned that your company is going bust, please get in touch with our partner-led team at Real Business Rescue. We offer free, same-day consultations so we can quickly establish the financial status of your business - we operate from an extensive network of offices around the UK.