The Risk of Company Insolvency for a Director
As mentioned above, the winding up petition process is a huge threat to your business if you fail to meet your required payments. There are many consequences to the insolvency procedure, and we’ll be sharing all. However, we’ll first touch on the compulsory liquidation process.
What is compulsory liquidation?
The effects of compulsory liquidation for a business are severe, with the primary consequence the closure of the company. The process is initiated by a creditor submitting a winding up petition to the court after all other avenues have been explored. To file a winding up petition is expensive, so the creditor will only do so if they believe an agreement cannot be reached.
There are many factors that can start the process of a winding up petition, particularly if you are not responding to creditor pressure. A creditor only needs to be owed a total of £750 in unpaid debts to begin the winding up of a company procedure. Therefore, as part of your director duties, you are expected to be aware of your company’s financial situation and safeguard the interests of creditors.
When the company is wound up by the court, the appointed liquidator will take control of the company and seek to sell assets to maximise realisations for creditors. You can read more on the insolvency legislation with our comprehensive guide.
When the official receiver is appointed to your case, they have a duty to examine the company’s financial records and books. They will do so to ensure there aren’t any irregularities, or examples of director misconduct, which you can read more about here. As a company director, you have duties and rules to follow, and the official receiver will look for signs of ‘unfit conduct’. Should they find any instances where director misconduct occurred, you could face director disqualification for 2-15 years.
Examples of director disqualification are as follows:
- Wrongful trading
- Not sending accounts or returns to Companies House
- Becoming insolvent due to illegal actions, such as hiring illegal workers.
- Not paying tax and continuing to trade on crown debts.
- Concealing or disposing of company property.
There is a difference to that of wrongful trading and trading while insolvent. If, as a company director, you know the company is heading for insolvency without hope of recovery, you cannot continue to trade. If this happens, the directors could become personally liable to contribute to the company assets. Be aware that not understanding the company couldn’t trade out of insolvency is not a sufficient defence. We have more information on wrongful trading and trading while insolvent here.
When starting a company, if your business obtains finance, you may have provided a personal guarantee. This is not such an issue if your business appears to be doing well and your financial situation is positive. However, if you face the threat of insolvency – you are liable to repay the full amount from your personal funds. Generally, most personal guarantees are unsecured, but others can be secured against your personal property. If you happen to have a personal guarantee, it can put your personal or private assets at risk meaning you need to take steps to deal with this. We have produced a directors guide to personal guarantees outlining the steps to take in dealing with any personal guarantees.
As part of the liquidator’s role, they aim to recoup as much as possible for the creditors. Their primary objective is to do so, and that often involves selling company assets. The returns will go to the creditors in the correct order of payment by way of pari passu distribution. For further information on which creditor will be paid first, you can do so with our secured and unsecured creditor guide.
Investigations will also take into account whether you have sold off company assets while the winding up petition is in progress. If so, the liquidator has the powers to reverse the asset disposal and restore it to the company. Once this is done, they will then sell the assets to gain money for your company creditors, or seek to recover adequate compensation from you as a director for taking an action detrimental to the company.
Loss of control
The main consequence of corporate insolvency is the complete loss of power as a director. Your powers as a director will cease and you are no longer permitted to manage the day-to-day responsibilities of the company, with the liquidator selling company assets to pay your creditors. However, you may still be called on to assist the liquidator and provide a statement of affairs or be answerable to their investigations.
If you are facing the prospect of compulsory liquidation and are concerned about the possible consequences, our business rescue experts can provide free advice to try and support your business.