Updated: 8th January 2020
Published: 2nd November 2017
As a company director you have certain duties and responsibilities in law. These include taking steps to ensure that creditors aren’t unnecessarily exposed to financial losses if the company experiences cash flow issues and becomes insolvent.
Insolvency is a serious situation, and you can be held accountable for misdemeanours or negligence that took place a number of years before the company’s decline. You’re expected to be aware of your company’s financial situation at all times, and to safeguard creditor interests.
When a limited company cannot pay its bills as they fall due, or the total of its liabilities is greater than its assets, it is said to be insolvent. Insolvency can happen very quickly, such as when the market changes or you lose a key customer, or it can take place over several years at a slower rate, that isn’t always noticed by those involved on a day-to-day basis.
If your business is currently struggling financially, or has already become insolvent, there are a number of potential ramifications for yourself and other directors. There may be routes out of insolvency, such as a Company Voluntary Arrangement (CVA) or pre pack administration, but if no such option is viable, compulsory liquidation may be the only outcome.
The effects of corporate insolvency, and ramifications for directors, can be severe. When a creditor forces a company into liquidation, all assets are sold to repay its debts. The appointed liquidator conducts an investigation as to why the business has failed, and there’s a possibility that you and your fellow directors could be held liable for its demise.
If the liquidator finds that you’ve traded whilst insolvent, for instance, or finds incidences where antecedent transactions have taken place, you could be disqualified as a director for 2-15 years.
Examples of antecedent transactions include:
It’s often necessary for directors to provide personal guarantees when their company borrows money. When the business is thriving, this doesn’t appear to be a huge issue, but if insolvency strikes you become liable to repay the full amount from your personal funds.
Depending on your financial situation this can leave you open to personal bankruptcy, and has serious ramifications for your own financial future. Along with the loss of your regular income as a director, you’re also at risk of losing your savings and personal assets.
The same applies if you have an overdrawn director’s loan account. The office-holder will view this as an amount owing to the business which you’ll need to repay in full, or face being pursued through the court by the liquidator.
If you’ve disposed of any business assets whilst a winding-up petition is in progress, the courts may decide to void the disposal and restore the asset to the company so that it can be sold for the benefit of creditors.
If you’ve provided security for a bank loan, the bank is likely to view your insolvency as a breach of covenant, which entitles them to seize the asset(s) in question.
In some cases, supplier terms and conditions include a transfer of ownership clause. This means that, without full payment being received for the goods delivered, ownership remains with the seller and you may have to deal with suppliers attempting to reclaim their stock from your premises.
One of the most noticeable consequences of insolvency in a practical sense is the immediate loss of control if the company enters administration, or has to be liquidated. The appointed insolvency practitioner takes over, and you and your fellow directors must cooperate fully during the ensuing process.
Failing to provide information requested by the Insolvency Service can lead to further action against you. Again, it could result in potential disqualification as a director, leading to being unable to pursue other business ventures in the future.
Real Business Rescue can help if your company is experiencing high levels of debt. Our licensed insolvency practitioners are here to advise you on the next step, and will establish your best options. Call one of the team for a free consultation – we operate from 55 offices nationwide.