Once a company has become insolvent because its debts and creditors are greater than its assets, the directors of the company have a statutory duty in their capacity as directors to act in the best interests of the company's creditors as a whole. The directors must be able to demonstrate that they have done everything possible under their control to ensure the repayments of all creditors using the company's resources.
The directors cannot deliberately take any actions that would cause the company's debts to increase or go unpaid. The directors should not show any favouritism towards particular suppliers or creditors. If a director fails to meet his or her fundamental duties of acting in the interest of all the company's creditors whilst trading insolvent, they are likely to face severe personal liabilities and disqualification from acting as a director of a limited company in the future.
I understand that as a director the last people you would ever want to speak to would be a business rescue firm, but I also know that trying to understand where you stand with your company debts can be equally challenging. I have seen every eventuality in business and can help clarify what your options are.
Directors also have a responsibility to ensure that their managers, shareholders, employees or anyone else that actively participates in the control of the company do not perform any actions that would be to the detriment of the company's creditors. Directors must - upon becoming aware of their company's insolvent circumstances - seek the advice of a licensed insolvency practitioner at the earliest opportunity in order that they avoid mistakes and future personal liabilities.
Directors' personal liabilities for company debts can be proved if it can be shown that they performed any inappropriate actions:
Continuing to pay shareholders dividends whilst the company is insolvent
Using fraudulent methods to raise the funds needed to repay creditors (i.e. – obtaining financing using misleading or inaccurate information, or collecting payment for goods or services that could not be delivered)
Withdrawing and/or using company funds for non-business activity; this is an offence known as misfeasance
Entering into a personal guarantee and then breaching its terms
Disposing of the company's assets at undervalue or no value
During the insolvency procedure liquidators, administrators and receivers are required to conduct a thorough investigation of the company's affairs and the directors' conduct to ensure there has been no wrongful trading or misfeasance.
If a director has acted in an inappropriate manner, he or she will receive an adverse report which is sent to the department of business, innovation and skills who will conduct further investigations and have the powers to disqualify directors for a period up to 15 years. Directors who are found to have an overdrawn directors' loan - and therefore owe money to their company - will be required to repay that money back to the company.
If you’re unsure about your duties as a director and are concerned that you may be at risk of wrongful trading accusations, contact us today to find out how we can help.
It is very good news that HMC Health & Beauty has been acquired as a going concern by a purchaser with a strong track record in the sector. Not only does it mean that the business will continue to trade, safeguarding the livelihoods of the staff, but it also puts it on a more secure footing for the future.Read the Case Study View all Case Studies
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