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Can you resign as director of a company in debt?

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Updated: 24th February 2021

Resigning as company director when facing the threat of insolvency

You can resign as a director of your limited company if it’s in debt. Resigning the office of director is a relatively straightforward process that involves officially informing various parties, but in some scenarios the fact that it has debts could prohibit a ‘clean break’ from the company.

Limited liability, or the ‘veil of incorporation,’ provides protection for directors from personal liability for company debts, and this remains in place as long as no misconduct or wrongdoing is uncovered.

In cases where the company has entered insolvency, misconduct might include taking dividends that the business couldn’t financially support, for example, or deliberately/negligently causing an increase in creditor losses.

Before we identify the specific issues you could face if you resign as director of a company in debt, let’s look at the resignation process itself.

How to resign as a director

These are the basic steps to resign as a company director:

  • Inform your fellow directors/shareholders of your intent to resign – you don’t need to provide a reason for your resignation, but you do need to include the effective date
  • Although not obligatory, you might want to let suppliers and customers know that you’re leaving the company, and provide the contact details of your successor/replacement
  • Complete Form TM01 and send it to Companies House – your name and details will then be removed from the company listing on the specified date

Although you aren’t responsible for decisions made within the company from the date of your resignation, if the business is in debt and enters into an insolvency procedure at any point, your responsibilities and liabilities remain in place.

Why it’s not always advisable to resign as director of a company in debt

Even though the company is in debt and may be at risk of entering insolvency, it might be a better option to remain in place as a director if you can. It allows you to continue to influence how the company is run, the decisions that are made, and potentially control the likelihood of personal liability.

If you left the company, you would have no access to financial information or be able to affect the decisions that were being made. Being director of a company in debt is certainly not the ideal situation, but it does enable you to control your own exposure to allegations in the future.

These are just two situations where the situation becomes more complex if you’re a director, or a former director, of a company in debt.

Personal guarantees for business borrowing

If you’ve provided a personal guarantee for company borrowing in the past, resigning as a director doesn’t make the agreement null and void. You remain personally liable for the outstanding sum, or a proportion of it, depending on the personal guarantee you’ve signed.

The lender has the right to pursue you through the courts if necessary, to recover their money, which could leave you at risk of personal bankruptcy if you don’t have the funds to repay.

Misconduct/malpractice

When a company enters insolvency, directors must prioritise their creditors’ interests and work to minimise their losses. This means ceasing trade immediately, and seeking guidance from a licensed insolvency practitioner (IP).

It may be the case that the business can be rescued – perhaps by officially renegotiating debts, for example – but if not, and the company enters liquidation, director conduct will be investigated by the office-holder.

These are just some potential instances of malpractice or misconduct:

  • Taking illegal dividends – those that were taken when there was insufficient distributable profit to support the dividends
  • Preference payments – fully repaying a loan with a personal guarantee attached, for instance
  • Wrongful trading – where trade continued after the company entered insolvency, and creditor losses increased
  • Taking assets from the company without payment

Liquidators look back several years for instances of malpractice, so even if you’ve already resigned, you do remain liable in these and other situations.

Should you resign as director of a company in debt?

There’s nothing to prevent you resigning as a director if your company has debts. It is prudent to carefully consider your decision in the light of these potential issues, however, as you lose a degree of control over the outcome.

You may be able to influence important decisions, such as ceasing trade at the right time, and seeking professional help – influence that you wouldn’t have if you resigned.

Real Business Rescue can provide further guidance tailored to your individual circumstances, and clearly explain the potential ramifications. Please call our expert team to arrange a free, same-day consultation – we work from a broad network of offices throughout the country.

Keith Tully

Partner

0800 644 6080
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