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Some issues can be addressed relatively simply while others that require professional insolvency services such as CVAs and administrations can necessarily take a little longer. 

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. 

The best thing to do is always getting in touch first to arrange a free consultation with one of our expert advisors. 

We can quickly get to understand your situation more clearly and be able to advise appropriate, effective and efficient actions you can take - quickly.

Stack of money

For many directors that’s part of the enjoyment and why they got into business in the first place. Overcoming the odds, having their decisions and gut calls proven right and achieving things they and others wouldn’t have thought possible.
These are good risks. There are also bad risks.
If your business isn’t performing well, is stuck in a trough or heading for insolvency then the risks of making poor financial decisions increases.
Loan Stacking is one such decision and it’s made worse because at the time it can look like absolutely the right thing to do for the business.

What is Loan Stacking?

Most simply it’s where a company takes out two or more business loans from different lenders at the same time. This can be from banks or other regular financial sources or from newer lending streams such as peer-to-peer platforms, secondary lenders or fin tech.
Unlike applying for funding from a traditional financial source like a bank, secondary funding usually isn’t so stringent regarding collateral or background checks and can sometimes be secured simply on the basis of personal guarantees from directors or senior management.

Drawbacks

As an example - let’s assume a company needs £30,000 to fund an extension or other business expansion.
Their usual, main lender A will only lend them up to £10,000. With some agility and cleverness and the use of personal guarantee, they can then obtain another £10,000 from online lender B and £10,000 from online lender C.  Great! They’ve got the money they need.
The first problem will be if Lender A checks their credit files and finds that they’ve obtained the additional funding from lenders B and C. Not a lot they can do right? Wrong.
The terms and conditions of loan A (and B and C) might render it null and void if the company entered into similar arrangements knowing that they may not be able to pay the amount back. Also there will usually be a condition allowing a lender to pull the lending facility and demand immediate repayment - which any could do at any time.
The loan from lender A will usually be monthly but if the loans from B or C are from alternative finance providers then the repayment terms and dates may also be different.
Some operators demand different and moveable repayment dates - every 28 days rather than monthly for example, or they could even insist on repayment on a weekly or daily basis depending on the deal they struck.
Repaying multiple loans with moving or irregular milestones could be problematic at best and this is if your business is stable and running a profit.  If you run into difficulties and start missing payments to one or more lenders then things can get real ugly, real quick.
Any insolvency practitioners that investigate directors’ behaviour and events to establish how and why a company ended up in administration or insolvency will take an especially dim view of favouring different lenders even before they are called.  
Needless to say, defaulting on payments also has a negative effect on credit ratings which could also draw the various loans to the attention of the other lenders. It’s their job to check the credit worthiness of their clients - especially when their money is on the line and seeing you take out lines of credit in addition to what they’ve lent out is raising a big red flag.

Alternatives

There are other safer ways of raising business capital for a company beyond loan stacking.
Most lenders will be sympathetic to your case if you have a proven record of trustworthiness with them and can often offer extended borrowing facilities if a proportion of the original loan, usually around 50%, has already been paid off.
You can also look to refinance your business loan with another lender. This is distinct from loan stacking as a proportion of the amount you borrow from lender B would pay off the loan from lender A so you while you have borrowed a larger amount, you still only have to budget for one regular repayment and interest rate.
Ultimately loan stacking is another symptom that your business is going through a rough storm.

This can even be a positive for the company and the individual in the long run depending on how you react to it and the decisions you make now. Contact one of our teams of advisors to set up a free conversation.

We can look at the whole of your business with an expert eye and make suggestions on how you can navigate back to calmer waters or even head to port for repairs. Taking on more debt, even for the right reasons is like taking on more water - it will just drag you to the bottom quicker.

We've covered the issue of taking out loans to support a business in an earlier blog post and ultimately we don't think it's a great idea when it comes to multiple loans.

loan stacking

loan stacking

If your business has got to this stage or is approaching it then your first call should be to one of our expert advisers rather than a loan provider. We can talk through your unique circumstances and most importantly what options your business has and the best way to proceed once you've made your decision.

According to the Companies Act 2006, a director includes any person occupying the position of director, by whatever name called. Often, a company will receive advice on the day-to-day running from a person not holding the official position. Those who do not hold the official status of director - commonly called a de facto director or shadow director - are still bound by certain duties. Breach of those duties can lead to severe consequences, outlined later in the article.
While you may provide instructions the company does act upon, you are not solely considered a shadow director for providing advice in a professional capacity.
The below are examples where you could be considered a shadow director:


De facto director

As mentioned above, a de facto director is also not officially appointed a director, but they assume the role. For example, a company may rely on the skills and qualifications of an individual in a senior position. While there is no definitive test for determining whether a person can be considered a de facto director, relevant factors will be taken into account. For instance, what capacity was the individual acting? Has the individual been using the title of director in written communications? Is the individual part of the corporate governing structure? A de facto director will also be liable for the similar duties to a de jure director, under the Companies Act 2006 and Company Director Disqualification Act. You could be considered a de facto director if you:

Duties of a company director

As a director, there are specific duties you must adhere to. You must act in accordance with the company’s articles and memorandum of association and work to promote the success of the company. Similarly, you must exercise reasonable care, skill and diligence and avoid conflicts of interest. The director duties are owed to the company and enforcement can be taken if there has been a breach of duty. In an insolvency situation, director’s investigations will be carried out to look for any evidence of wrongdoing. You may be liable for offences under the Insolvency Act, so it’s important to err on the side of caution.

Risks from insolvency

Directors accept fiduciary, statutory and common law duties when holding the status. It has been said that shadow directors should also assume the same responsibilities. If you do this and act in the interests of the company, it’s likely you will reduce liability. However, if the company does enter insolvency, your actions will be scrutinised as part of a directors’ investigation. This will determine your role at the company, and identify any instances of personal liability. This might include:

Alongside the above risks, you could damage your personal reputation if associated with a company facing insolvency. This is even more prominent if you have been seen to act unlawfully to avoid legal repercussions.

Director disqualification

Shadow, or de facto directors, can be disqualified under the CDDA if in the ‘position’ three years before the start of the insolvency procedure. You can be liable for director disqualification if you have not met your ‘legal responsibilities’. For example:

The insolvency practitioner (IP) will file a report for the Insolvency Service to decide whether to commence disqualification proceedings. If the order is made, you will be unable to act as a director between 2-15 years. In addition, you may be ordered to contribute to the insolvent estate. Where fraud has been identified, you could even face criminal action. More information on the subject can be found here.

Manage the risks

There are certain actions available that can reduce the risks of the above procedures. You could allow board members to make the decisions on behalf of the company, and only act on their instructions. Alternatively, you could consider becoming formally appointed as a de jure director, so there is no doubt as to your position in the business.
Ensure simple measures are completed, such as completing and filing company accounts with Companies House. Taking care of these obligations will reduce pressure if the company faces signs of insolvency.
We do recommend seeking professional advice if you are unsure of your position, and need help mitigating the risks. Our business rescue experts have the experience to clarify your position and work to find the best possible solution.

Statistically speaking...

The Insolvency Service provides various statistics each quarter which will help us put this in context.
In the three years to 2016 there was 16,215 company insolvencies on average.  Of those, the average number of disqualifications was 1,204 per year.  Of that number, 95% relate to insolvent companies, and 5% relate to convictions.  (Note: disqualification proceedings must take place within three years of the insolvency.  This means that the disqualifications put in place in 2015, will most likely relate to insolvencies in 2014, and possibly 2013 too.)
If we assume that the 95% of insolvent company disqualifications average 1,143 per year, and there are 16,215 insolvencies on average, then around 7% of company insolvencies lead to disqualification.  
In reality this figure is likely to be slightly lower.  It would not be unusual for more than one director of a company to be disqualified where evidence of unfit conduct has been found.

Insolvency Service Statistics

What are the main reasons for disqualification?

The table below shows that just over half of the allegations are in relation to unfair treatment of the crown.  
This is likely to mean that HMRC was a majority creditor in the insolvency, and that the Insolvency Service considered other creditors to have been paid substantially in priority to any tax debts which had arisen.  It may have also deemed that the company used funds which should have gone towards tax debts to continue trading instead.  In our experience, directors are considerably more likely to be considered for disqualifications for unfair treatment of the Crown if they haven’t paid any tax at all within the 12 months prior to liquidation.
One of the reasons that unfair treatment of the Crown accounts for over half of all disqualifications, is that it's comparatively easy to prove.  In contrast, disqualification for misappropriation of assets accounts for only 2.26% of disqualifications.  This is due to complications in compiling evidence, and certainly not because it is 25 times less common an occurrence!
Director Disqualifications

How can we help?

If you are a director facing potential disqualification proceedings, we are able to advise and negotiate on your behalf.  We understand the process as both ‘poacher and game-keeper’, and can help formulate a strategy for defence. 
If you have any further questions about disqualification don’t hesitate to contact one of our business rescue experts.

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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