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.
The support given by the government to pay 80% of furloughed employees salary is a welcome one - especially for employees who can manage the reduction and self-isolate accordingly.
Many owners, directors and employees would rather keep working but due to a combination of the circumspect rules, peer and government pressure to remain at home and the economic reality of cessation of trade for many businesses means that this is an impossibility.
But is it as simple as that for directors?
We’ve previously talked about the statutory duties attached to directorships and how directors have to carry them out to the best of their ability.
And while some legislation is being tweaked to mitigate the impact on companies of the covid-19 coronavirus pandemic, this isn’t the case when it comes to directors duties.
Firstly, in theory directors can be furloughed in the same way as any other employee if they’re paid entirely or proportionally through the PAYE system.
Hold the champagne however, as a condition of being furloughed is that the employee is not allowed to undertake any work for the company. How then can this be compatible with the essential duties a director has to undertake?
Thankfully, it can be.
Directors have a legal fiduciary duty to their company and they simply could not operate or function without a legal director in place to oversee them.
So a skeleton crew, potentially even of one, is required to keep a hand on the tiller and oversee regular activities such as keeping books and tax details up-to-date, overseeing any essential banking or financial transactions or collecting and sending post.
Now, there may be some middle ground that could be occupied where a company goes into a kind of “hibernation” where a director wouldn’t have anything to do with day-to-day business operations but they would manage the essential matters.
In short, a sole director can furlough and the company can remain in existence, as long as the company doesn’t carry out any commercial activities.
For owner managed business, how does furloughing compare to redundancy?
This is a key point and should be considered by every cash starved sole director unable to trade through Covid-19. What will you be paid under the furlough vs what would you get from the government’s National Insurance Fund.
This director is receiving £11500 per annum through PAYE (with or without dividend payments on top)
Furloughed net monthly salary entitlement estimate £766.67
Net estimate total x 3 months £2300.01
Redundancy Entitlement calculation
This director is 49, has 8 years’ full service with the company and works full time (40 hours per week). They receive £11500 through the PAYE (with or without dividends) annually.
Redundancy entitlement £4,185.60
Notice entitlement £,2790.40
Total entitlement £6,976.00
Crucially, if this director has been unable to pay themselves in the last months, should the company go into liquidation, they will also be able to claim arrears of pay (up to 8 weeks), any outstanding holiday (up to 6 weeks), and if no notice was received or notice was worked and not paid, the above entitlement would apply.
This calculation would apply if they earned less than £11500 through PAYE or up to approximately £18000.
There are a lot of unintended consequences playing out as the covid-19 coronavirus pandemic unfolds, not least when it comes to the irresistible force of running a business meeting the immovable object of existing legislation.
One of the traditional advantages of being a sole-trader or smaller business is that you have the agility lacking in larger and more bureaucratic company structures to make changes but even this is being stretched against the possible and legal bounds of business activity.
Fortunately, there’s an expert ear you can turn to that can help you evaluate your ideas to help your business survive and ultimately thrive in unchartered waters.
Contact us today to arrange a free initial virtual consultation with one of our team of expert advisors.
They remain constantly available to work with you on understanding the unique issues facing your company and to give you friendly, professional advice on how you can best navigate through them.