Business Recovery and
Insolvency Practitioners
In this section we give an overview of Directors
responsibilities and potential liabilities in
relation to a company experiencing financial
difficulty. Please remember that every case
is different in some way and we strongly recommend
a no charge consultation with one of our specialists.
Actions
which a Liquidator may take against directors.
What is a Director?
Under the Companies Act 1985, a director is
"any person occupying the position of director
by whatever name called".
In more practical terms, a director is any person
who has control over or who holds responsibility
for the direction of a company's business.
A shadow director, under the Companies Act,
is "a person in accordance with whose directions
or instruction the directors of the company
are accustomed to act".
The reporting requirements of the Insolvency
Act 1986 require a duly appointed Liquidator,
Administrator or Administrative Receiver to
report on the conduct of those persons who were
directors, or shadow directors of the insolvent
company during the 3 years prior to the date
of insolvency.
BACK TO TOP
Date of Insolvency
By the Insolvency Act 1986, the date of insolvency
is defined as the date on which a Liquidator,
Provisional Liquidator, Administrator, Administrative
Receiver or Supervisor of a Voluntary Arrangement
was appointed either by the creditors, the Court
or a debenture holder.
If a Liquidation, or Voluntary Arrangement
follows immediately after the release of an
Administration Order the date of insolvency
is the date of the granting of the original
administration order.
BACK TO TOP
When does
a company become insolvent?
When it is unable to pay its creditors as
and when they fall due for payment, and/or when
the value of its assets does not cover its liabilities.
Company directors are legally obilged to ensure
that they understand the company’s finances
and that they deal with them in the correct
manner.
BACK TO TOP
What a
director should and should not do.
A director should:
- Make sure that the true market value is
received from the sale of any of the company’s
assets.
- Keep proper accounting records and submit
returns and accounts to Companies House on
time.
A director should not:
- Continue to trade when the company is insolvent,
unless you can demonstrate that there is a
strong prospect that the company will avoid
insolvent liquidation. Doing so could result
in prosecution, being banned from directorship
and being made personally liable to contribute
to the assets of the company.
- Issue cheques or incur further credit when
you know there is little or no prospect of
payment.
- Take customer deposits when you know the
company cannot fulfil the order.
- Do not make the decision to pay certain
creditors in preference to others.
BACK TO TOP
Minimise the
risk of personal liability and a ban
- As soon as you suspect that your company
may be heading towards insolvency make an
appointment to discuss the situation with
an insolvency specialist. It is never too
early to have this discussion, whilst as many
options as possible are still open to you.
- Hold regular meetings and continually assess
the company’s situation keeping detailed
records and formal minutes of everything you
discuss, and the reasons for your decisions.
- Make sure you use accurate and up-to-date
accounting information to establish the precise
financial condition of the company.
- If your company is insolvent, take steps
to minimise the loss to your creditors and
don’t delay in seeking professional
advice.
BACK TO TOP
Actions which
a Liquidator may take against directors
Wrongful trading
(Section 214 Insolvency Act 1986)
You continue to trade when you knew or ought
to have known that your company was insolvent
and had no prospect of avoiding insolvent liquidation.
If found guilty a director will be required
by the court to contribute to the assets of
the company as compensation to those creditors
who have suffered due to the wrongful trading.
The level of contribution is generally assessed
on the extent to which the company’s financial
position deteriorated since it was known or
should have been known that it was insolvent
with no reasonable prospects of avoiding insolvent
liquidation.
A successful prosecution may also lead to action
under the Company Directors Disqualification
Act 1986, seeking to prohibit you from acting
as a company director for a period of between
2 and 15 years.
Defence against such an action would involve
proving that every step was taken to avoid worsening
the position of the creditors, or mitigating
their loss.
BACK TO TOP
Fraudulent
trading (Section 213 Insolvency Act 1986)
You carry on business with the intention of
defrauding your creditors.
If found guilty, you face penalties are the
same as those incurred in wrongful trading.
In addition however being found guilty of fraudulent
trading may result in a limitless fine and /
or imprisonment for up to 7 years.
BACK TO TOP
Preference
Transactions (Section 239 Insolvency Act 1986)
A preference transaction is any transaction
entered into between a company and a third party
which has the effect of placing the third party
in a better position than he/she/it would otherwise
have been in, had the transaction not taken
place, in the event of the company going into
liquidation.
One of the most common types of preferential
transaction is discharging a debt to a favoured
creditor shortly before the company goes into
liquidation. The creditor is preferred because
he/she/it receives payment of the debt in full
whilst other creditors may receive nothing,
or only a percentage of their debt, from the
company in liquidation.
An Administrator or Liquidator may only seek
orders setting aside the preferential transaction
(or other order under the section) if it was
entered into 6 months prior to the “onset
of insolvency”, which will usually be
the date upon which a formal insolvency procedure
was commenced.
If however the transaction is between the company
and a person “connected” with the
company then this time limit is extended to
2 years.
A person (which includes a company) is “connected”
with an insolvent company for the purposes of
this section if he or she is:
- A director or shadow director of that company;
- An associate of such a director or shadow
director;
- An associate of that company.
An individual person is “associated”
with another individual if he/she is the spouse
of that individual or a relative (sibling, uncle,
aunt, nephew, niece, child stepchild or adopted
child) of that individual or in partnership
with that individual.
A company is “associated” with
another company if the same person has control
of both companies. Broadly speaking a person
(which includes another company) has “control”
of a company if the directors are accustomed
to acting on his/her directions or if he/she/it
owns more than a third of the voting shares
in that company. There are also further rules
governing groups of individuals who have linked
shareholdings in companies.
If an individual or company is “connected”
with the company making the preference then
the burden of proof also shifts against the
connected party in relation to the other requirements
under the section which need to be established
for the transaction to be successfully challenged.
BACK TO TOP
Transactions
at an undervalue (Section 238 Insolvency Act
1986)
You conduct a transaction with any party in
which the company receives significantly less
than the value of that which it has released
to the other party.
The relevant time period for a transaction
at undervalue is the same as for a preference
transaction, that is a liquidator or administrator
can bring an action in respect of transactions
that occurred within a 2 year period prior to
the date of insolvency in the case of associated
parties and 6 months in the case of non associated
parties.
The penalties are the same as for preference
transactions.
BACK TO TOP
Misfeasance
When an officer, liquidator, administrator,
administrative receiver, manager or promoter
of a company breaches their fiduciary duty,
by misapplying, retaining or becoming accountable
for any money or property of the company.
A liquidator or Official Receiver may bring
an action for misfeasance against all or any
of the above parties, who if found guilty may
be required to repay, restore or account with
interest in respect of the money or property
misappropriated, or contribute by way of compensation
such amount as the court sees fit.
BACK TO TOP
Transactions
Defrauding Creditors (Section 423 Insolvency
Act 1986)
Defines actions that are similar to those
dealt with in Section 238 Transactions at Undervalue
but removes the time limits.
The penalties for successful prosecution by
a liquidator, administrator, or supervisor of
a voluntary arrangement are broadly in line
with those for breach of Section 238.
BACK TO TOP
Restriction on
reuse of Company Names (Section 216 Insolvency
Act 1986)
This applies where a director or shadow director
of a company that has gone into insolvent liquidation,
operates without leave of court, as director
or shadow director of a new company with a similar
name to that of the insolvent company, in the
5 year period following the date of insolvency.
To be guilty of breach of Section 216 a person
must have been a director or shadow director
within a period of 12 months prior to the date
of insolvency.
The penalties if found guilty include imprisonment,
a fine or both, together with personal liability
for the debts of the new company. In addition
any person who knowingly acted under instruction
from the guilty party can incur personal liability
to contribute to the debts of the new company.
BACK TO TOP
Company Directors Disqualification
Act (CDDA) 1986
A liquidator, administrator or administrative
receiver is required to investigate and report
on the conduct of all persons who were directors
or shadow directors of the insolvent company
during the 3 years prior to the date of insolvency.
The report may include some, all or none of
the areas of misconduct detailed above. The
investigation will also include, but not be
limited to, director’s remuneration, compliance
with company legislation including keeping proper
accounts and co-operation with the insolvency
practitioner in pursuit of his duties.
The report is submitted to the Disqualification
Unit of the Insolvency Service, an agency of
the Department of Trade and Industry where the
decision whether to pursue an action for disqualification
is made.
A successful action by the DTI will result
in a person being disqualified from acting as
a company director or being involved in the
formation, promotion or management of a company
for such period as the court decides.
BACK TO TOP
Business Recovery and
Insolvency Advice Manchester
32 High Street, Manchester, M4 1QD
Home | About
Us | Services
| News | Companies Act | Enterprise
Act | Sitemap
Directors
Legal Responsibilities | Glossary
| FAQ | Contact
| Fantasy Football
Website Designed and Hosted
by Autus |
