Directors Duties in Insolvency

I am a worried director. I have always paid my bills on time before and now I have a problem that I can’t sort out.

“What should I do? What are my duties as a director?”

The most important thing is not to do nothing and don’t panic! What you need to do is have a read of all the guides to find out what all the options are. If you don’t have time then don’t worry, give us a call on 08009700539 or 020 7887 2667, we can explain the situation, and happily talk to you for free to give advice and to see if we can help. We will also come and see you for you no charge and send you our solutions report which sets out your options.

Directors Duties If The Company is Insolvent

In law, if a company is insolvent then the directors have a duty to the creditors not themselves, or the shareholders. As such, the first thing to to do is establish whether the company is insolvent. We have an online insolvency test to help you establish this. If your business is insolvent then you must act to ensure that you do not make the creditors’ situation worse. Some directors are guilty of wilfully piling up debt with no hope of paying back creditors – by doing this they are risking an action for wrongful trading that can lead to disqualification and personal liability for the company’s debts. Some directors breach their duty to creditors by removing assets from premises or selling assets to another company at less than full price. This is known as a transaction at an undervalue, and can be reversed by the liquidator.

Because of these regulations it is imperative that you seek advice before embarking on such a transaction.

Another trap that directors often fall into is assuming that the assets and monies in the company’s bank account belong to them personally. Even if a director has funded the business by putting his/her own money into the company this does not mean that assets belong to them. THEY BELONG TO THE COMPANY and the company owes them. If the company goes into a formal insolvency process they would be classed as a creditor and may receive some of the money back. But this is not guaranteed. Ultimately our advice though is not to fund a company personally without any sort of security for the debt.

Obtaining proper advice from specialist turnaround practitioners will help to ensure that you are acting in the best interest of the creditors.

What should you do to ensure you are compliant with your duties as a director?

Try these tests below and see where you might be.

The business is viable if it weren’t for the bad debt.

Basically, if you feel you could continue your business profitably, if only you could sort the debt that is hanging over your company as a result of a bad trading year or one big creditor, then perhaps a company voluntary arrangement or a pre-pack may be the solution.

I don’t think I should carry on!

If the business has no future and is unlikely to be able to continue, then a creditors voluntary liquidation may be the answer. This is preferable to having your business wound up in the Court and the Court’s official receiver looking into your affairs. What is more, it is ensuring that the business is closed down in a legally correct and orderly way and the creditors can be handled by the liquidator who will remove the creditor pressure for you.

The other options are really just a variation on the above. If you have a buyer for the business then a pre pack could be an option but these are becoming less used these days and need careful consideration. Administration is a powerful tool to protect your business from all creditors, including the bank, but it means that you lose control of the business and it can be costly and damaging to the business going forward.

What if the business has been served a winding up petition?

If this happens and you are not able to pay the debt then you should seek professional advice quickly.  It may be possible to ask for an adjournment while a rescue plan is put in place.  See our page on winding up petitions for further information.  Whatever you do do not transfer assets out of the company or pay any debts as they are likely to be reversed by the court or a liquidator at a later stage.