Company directors can be disqualified if they do not meet their legal responsibilities. When a company is unable to pay its debts the law sets out a number of specific duties that a director must comply with. However, this is likely to be a highly stressful situation and it is not uncommon for directors to be in breach of one or more of their duties for example, by continuing to trade the business when they know it cannot pay its debts.
If this happens they may be disqualified from being a director. Disqualification is for a specified period, between two years and 15 years. During that time the director is prohibited from being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without the court’s permission. The term ‘director’ is widely defined in the law and can include individuals who do not have the title ‘director’.
The court also has powers to order a disqualified director to pay compensation to the Company for the benefit of its creditors.
The Insolvency Service
When a company enters into a formal insolvency process a director’s behaviour will come under scrutiny. The liquidators or administrators are required to make a confidential report on the directors’ conduct to the Insolvency Service which may investigate you if there has been a report complaint of unfit conduct.
Unfit conduct covers the following:
Allowing a company to continue trading when it can’t pay its debts
Not keeping proper company accounting records
Not sending accounts and returns to Companies House
Not paying tax owed by the company
Using company money or assets for personal benefit
For many directors the first knowledge they may have that there is a threat of disqualification will be the receipt of a letter from the Insolvency Service.
Next Steps
When operating a distressed business you will be making difficult decisions. Having a clear understanding of what is legally required of you is essential.
If you are concerned that you could face disqualification proceedings or if you receive correspondence from the Insolvency Service regarding your conduct as a director, you should seek professional advice as soon as possible.
We have acted for directors facing disqualification proceedings. We have also advised Insolvency Practitioners (IPs) on whether the actions of company directors amount to a breach of their duties. In addition, we have advised individuals who have been disqualified on their roles post disqualification and we have applied for leave of the court for them to hold office during a period of disqualification.
We advise a wide range of stakeholders on litigation that arises as a result of a company being insolvent. This includes actions against the company and its officers as well as actions which the directors, officers or insolvency practitioners (“IPs”) pursue on behalf of the company.
Advising Directors/Shareholders
We advise directors/shareholders on numerous matters including:
Directors duties and how to ensure they do not breach them and leave themselves or the company open to claims.
Bad debts, property issues and other matters that could give rise to financial issues for the company.
Claims against the company and the best action to take.
Claims against employees, fellow directors and other stakeholders.
We regularly accompany directors and shareholders to meetings relating to disputes to enable them to obtain immediate advice on the best way forward.
Advising IPs
We advise IPs on all aspects of litigation arising out of insolvency, whether that be bringing a claim on their behalf or defending one.
We also assist IPs with applications to court for directions, administration orders and extensions and approval of their costs.
Advising banks, lenders and other creditors
We regularly advise lenders, suppliers and other creditors on proposed actions against companies which are struggling to pay their debts. Our broad range of experience means that we can give useful commercial advice on the best way to recover debts and the realistic prospects of success. If an insolvency process is the best way forward, we can work with creditors to achieve the best outcome available.
We regularly advise organisations and individuals on loan arrangements with companies which include taking security over assets in case the borrower defaults on the repayments and becomes insolvent. Clients range from banks, finance companies and private debenture holders to shareholders who have taken security for deferred consideration following a business sale or directors who have lent money to a company and require security.
We provide advice on the different types of security available and how effective each type will be in each situation. We draft security documentation and register this where required and we advise clients on how to enforce the security and the different enforcement options available to them.
Types of security
The main types of security that are granted are charges (fixed and floating) on a variety of assets , mortgages and pledges.
When deciding whether to take security and what security is appropriate, the lender must consider a number of factors.
We have a wealth of experience of advising on all types of security and can offer clients legal and commercial advice on their situation.
If you are loaning money to a company or if you are struggling to obtain repayment of an existing loan please get in touch.
If you are a business owner, in business with one or more partners, have you taken time to consider what might happen to the business if you, or one of them, were suddenly not around or capable of taking part?
On 1 April 2019 the jurisdiction of the Financial Ombudsman Service (“FOS”) was extended to include additional categories of eligible complainants such as more SMEs and individual guarantors of loans. The FCA has also indicated that it intends to increase the limit of an award which can be made by the FOS under its compulsory jurisdiction scheme from £150,000 to £350,000, probably sometime later in 2019.
The Credit hire and credit repair industries and ancillary services provided to claimants in “no fault” accidents have traditionally been regarded as challenging sources of business for invoice financiers, but there are signs that financiers are becoming more comfortable with the risks involved.
It is fair to say that these industries have over recent years been subject to a number of measures by the Government in attempts to reduce overall insurance premiums, but they continue to display a sense of innovation.
The recent decision by one of the main bank owned invoice financiers to withdraw from the provision of credit protection has highlighted a continuing debate within the industry on issues arising from the interface between bad debt protection on the one hand and the provision of insurance on the other hand.
It is now widely understood within the industry that the provision of insurance is a regulated activity under the Financial Services and Markets Act 2000 (“FSMA”) which requires providers to be authorised and regulated by the Financial Conduct Authority.
There are various ways in which a business can protect its business interests whether that is profit or cashflow. Many will look first at the internal workings of the business to make savings and some may never look at their other options with external parties. Having in place contractual provisions which assist you in that regard are often overlooked. The aim of this article is to provide some ideas on how a business can protect itself in these uncertain times.
Liquidation is the procedure through which the assets of a company are realised and distributed to creditors to satisfy the company’s debts in accordance with the Insolvency Act 1986. At the end of this procedure the company is dissolved and no longer exists. The process is often referred to as winding up a company.
Liquidation can happen in isolation, for example if there is no prospect of selling the company, but it can also follow as an exit route for a company in administration. In 2018 over 15,000 companies were liquidated.
There are two types of liquidation; voluntary liquidation and compulsory liquidation.
Voluntary Liquidation
Voluntary liquidation can be achieved in two ways:
Members’ voluntary liquidation – this option can be used if a company is able to pay its debts but the management have decided to wind up the company, for example on retirement.
Creditors’ voluntary liquidation – if a company is unable to pay its debts then a creditors’ voluntary liquidation is the process to follow to wind up the company.
Compulsory liquidation
A compulsory liquidation comes about as a result of the court granting an order to wind up the company, most likely on the petition by HM Revenue & Customs of one of the company’s other creditors.
The Role of the Liquidator
The liquidator has wide ranging powers including to collect and realise assets, to disclaim onerous property, to pursue or defend legal proceedings and to challenge antecedent transactions.
What to do next?
If you think your company is in danger of being liquidated, has received a winding up petition or if you are considering exit strategies that include liquidation, it is important to seek professional advice.
We act for liquidators, creditors and companies in relation to the liquidation process. We can offer practical and commercial advice as well as giving you expert advice on your legal position.
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