Insolvency – what are the implications for directors?

BLOG14th Oct 2019

We are living in uncertain times and the current financial climate, alongside the turmoil in British politics caused by Brexit, is making it harder and harder for businesses to survive, as shown by the recent high-profile insolvencies of Thomas Cook; Debenhams and Jamie’s Italian.  

It will always be a stressful time if your company is not performing as expected but the key is to not put your head in the sand and ignore the situation. If your company is faced with insolvency, you have a duty not to worsen the position for the general body of creditors and there are a number of matters you should consider: 

Personal Guarantees 

Following an insolvency event, any personal guarantees given by the directors are likely to be called upon. This is especially an issue if any personal guarantees have been secured over personal assets.  

Directors’ loans 

Should there be any outstanding directors’ loans due to the company at the date of any insolvency then these will need to be repaid in full.  

Disqualification/action against directors 

As part of any insolvency process, the Insolvency Practitioner (“IP”) appointed must submit a report to the Insolvency Service on the conduct of the directors.  Should the Insolvency Service deem that the directors have committed any offences then they could be faced with a disqualification from acting as a director for anywhere between 2-15 years.   

Matters that IPs and the Insolvency Service will look at as part of their investigations include: 

  • The causes of the insolvency 
  • Whether the Company’s accounting records/filings are up to date 
  • The level of HMRC debt and how it compares to the company’s other liabilities  
  • What the directors did to mitigate the situation for creditors 
  • Whether the directors assisted the IP with their enquiries & complied with their obligations. 

They will also investigate to see if any of the following offences, amongst others, have been committed. These are not only grounds for disqualification but can also lead to actions against directors for the recovery of any sums lost by the company: 

  • Misfeasance/breach of fiduciary or other duty. 
  • Wrongful trading – The continuation of trade when the Company is insolvent. 
  • Unfair preferences – The failure to treat all creditors equally by paying some creditors in preference to others.  
  • Gratuitous alienations – The transfer or sale of assets at undervalue; thereby putting the full value beyond the reach of creditors.  

A future blog will go into more detail about these offences in due course. 

Any IP will also look to see if the directors got any advice and if so, when, and whether, they acted upon it. The earlier you get advice, the greater the options available to you will be and the more the consequences of any potential insolvency can be managed.   

Our R2 team have the skill and experience to help and guide directors through any financial predicament. We will work with directors in order to achieve the best possible outcome for them, the company and the creditors; whether it be a solvent solution (i.e. the introduction of new finance or the negotiation of breathing space with HMRC/creditors) or an insolvency process.  

 If you have any queries please do not hesitate to contact Duncan Raggett, or your usual AAB contact.