Company Insolvency - What are my Responsibilities as Director?
- AuthorKieren Palfrey
The Insolvency Service has recently published its monthly statistics for recorded insolvencies of registered companies in England and Wales. Insolvency rates for registered companies in July 2022 were 67% higher than in July 2021. The statistics also show a 43% increase for the month of August 2022 from that of the same month the previous year, and the most recent for September is 16% higher than in September 2021.
Unfortunately, more directors than ever are faced with the unsettling prospect of their company becoming insolvent, either because it is unable to pay its debts when they fall due or the company has more liabilities than assets on its balance sheet.
As a director, it is important to note that when a company is considered insolvent, there is a shift from your prioritisation of shareholders and maximisation of profits for the company, to your creditors. All actions taken on the company’s behalf up to and on insolvency must therefore clearly demonstrate the priority of creditors in order to avoid any personal liability.
Under the Insolvency Act1986, there are several instances where directors may be caught out by their duties to creditors, including:-
Trading when Insolvent
A director can commit a criminal offence for fraudulent trading if their company continues to trade when insolvent. There are a number of scenarios where this can apply, such as:
- accepting credit from suppliers despite being aware that repayments cannot be made,
- taking deposits from customers when aware the product will not be delivered,
- repaying director loans while other creditor loans are not, or
- otherwise wilfully piling up debt.
This offence can carry serious penalties, including fines and a prison sentence.
A director can be liable for wrongful trading for the very same reasons as fraudulent trading, except wrongful trading does not require intent like its criminal counterpart. Directors can carry out wrongful trading even if it was not intended, so directors should be astute to ensure deposits are only accepted and debts incurred when the company is solvent. The consequences for directors who wrongfully trade while insolvent can still be severe:
- a) fines
- b) potential personal liability for the company’s debts up to the point the directors knew, or ought to have known, the company was insolvent; or
- c) disqualification.
Loans and Transfers at an Undervalue
- Where a company asset, such as a vehicle, machine, property, stock, is either gifted or sold below its true value, this may be deemed a transaction at an undervalue. Directors can easily fall foul of this when transferring company assets to another subsidiary company in their control or to family members. Liquidators and administrators can apply to have these transfers set aside within two years of the onset of the company’s insolvency, so it is important to take advice before these transfers are made.
- Where such a transfer is made with the intention to deliberately put the company asset out of the reach of creditors, these transfers may be set aside, but there is also a risk that you could also be committing a criminal offence.
- A director can be required to repay any funds, compensate the company or reinstate any company property by an official receiver, liquidator, creditor or a company shareholder where they fall foul of the misfeasance provision. A director can easily be caught by this section when making an unauthorised division or granting improper loans for example.
Due to the risk of personal liability, it is critical that directors take early advice when they recognise their companies are in financial distress, even if it may be temporary. It is also important to ensure you are aware of your legal duties on insolvency, minimising losses for the company and its creditors, and the reducing the prospect of any personal liability.