When it comes to liquidating a business, one of the most frequent questions we get asked is how it will affect directors.
Not just in terms of their reputation and pride but also more tangible potential consequences such as their credit rating and in more extreme cases, their freedom.
Before we look at that in more detail – we’ll consider what responsibilities directors have when they run a company apart from the day-to-day decisions.
Directors have certain legal duties to fulfil when running a company. These include:
- Paying any and all tax owed by the company
- Keep up-to-date accounting records
- Submit annual accounts and significant changes to Companies House
- Don’t use company assets or funds for personal benefit or gain or sell them off at an unrealistically low price
- Don’t falsify accounts or lie to creditors
- Don’t take out additional credit with no realistic chance of repayment
- Don’t allow the company to trade on when it can’t pay its debts
If they break any of these rules, either knowingly or unknowingly, then they could be guilty of either wrongful or fraudulent trading and the consequences that follow.
While wrongful and fraudulent trading sound similar, there are real differences between the two.
The first one is that wrongful trading is a civil offence and fraudulent trading is criminal. The difference is the intent.
If directors carry on their business, knowing they can’t pay their debts or not intending to, then this is fraudulent trading.
Where there’s no intent to defraud creditors then it’s wrongful trading but it’s still considered poor judgement. Hoping that fortunes will change or that something will turn up is one thing, but continuing to trade with no realistic prospect of recovery is another.
The civil aspect of wrongful trading means that directors could be personally liable to contribute to company assets to help repay creditors in a liquidation. This is calculated based on the actual losses of creditors from the point it’s determined that the company had no hope of recovery.
Even if the appointed liquidator doesn’t bring an action of wrongful trading, The Insolvency Service may bring a compensation order. This means that the directors would be personally liable to make a contribution to the assets of the liquidation.
Anyone found guilty will also be subject to the company director disqualification act with the length of suspension automatically set at six years.
Fraudulent trading is a criminal offence and carries a penalty of up to ten years in prison and also makes the guilty parties personally liable for contributions to company assets to repay creditors.
Whether your credit rating is affected by liquidation depends entirely on what kind of business you’re a director of.
If you’re the director of a limited company then most likely you won’t be liable for any company debts.
Your personal and company accounts are separate and unless you’ve made any personal guarantees or have an overdrawn directors loan account, it shouldn’t impact on personal creditworthiness or finances.
The exception to this is if your part of a partnership or operating as a sole trader. Here the business is not a separate legal entity and if there are any negative financial issues then they could go onto your personal credit report.
If your business is facing an insolvency event then get in touch with us.
Our expert advisors can arrange a free initial consultation where we can look at what we can do to help you and your business right now as well as in the days and weeks ahead.