Business Rescue Expert will answer your questions in 2021
One new thing we’re going to do in 2021 is to use some of these inquiries as examples and answer them publicly as well as we can.
Not only will it help demystify the sometimes opaque world of business and insolvency advice but it could also give you some food for thought if your business is going through something similar.
This week’s question: “Can the sole director of a company resign? And if so, what happens to any debt?”
Being a director has extra responsibilities above regular staff and shareholders.
They have legal responsibilities and duties they have to carry out and while they can leave a business, there’s still some steps they have to follow – they can’t just walk out of the door with their bags packed. These fiduciary duties are defined under the Companies Act and there is a risk of significant personal liabilities if these duties are not complied with.
In a limited company they should put their resignation in writing and send copies to any other directors or shareholders. They don’t have to divulge any reason but they are required to state the date the resignation takes effect.
They also need to inform Companies House through a TM01 form so they can update their records accurately.
While this will be the end of their official association with the company, their conduct may be investigated if the company subsequently enters an insolvency procedure within three years of their departure and any evidence of malpractice is discovered.
This could potentially lead to disqualification from being a director for a period of years if convicted. Similarly, they’ll still be held jointly and severally liable for any personal guarantees given while a director if the company can’t repay them as well as any further losses as a result of resigning from the company in lieu of dealing with the company’s affairs.
In short we strongly advise against trying to walk away from a company, if you are the sole director, given these risks.
We asked Business Rescue Expert’s Insolvency Director Chris Horner, a licensed insolvency practitioner, what the criteria was for sole director resignation.
He said: “If they’re also the sole shareholder of the business then they are deemed to remain in control of the company. They are effectively still a director even if they formally resign.
“The debt will also remain with the company and won’t disappear. If the debt is of a nature that it will continue to increase, this is an even bigger risk for the director.
“What happens next depends on their intentions. Legally a company requires at least one director to continue to operate so they would either have to find a replacement, willing to act as director; look to sell the business to someone who can resurrect the business or look at closing the company.
“If the concern is the company cannot realistically meet its obligations and pay its debts, the latter would be the appropriate route and a Creditors Voluntary Liquidation (CVL), would probably be the most efficient way of closure. If the concern on going down this route is the cost, there are a number of options to effectively fund the liquidation”
We hope this gives you a little more clarity surrounding the position of directors and what they can do if they want to extricate themselves from a company but we would always recommend getting professional advice before making any hasty decisions and acting on them.
There may be some advantages or benefits available that you don’t know about or could access if you chose other methods of proceeding.
We can quickly get to understand your situation more clearly and be able to advise appropriate, effective and efficient actions you can take – quickly.