Directors owe a duty to the creditors, not themselves or shareholders once insolvency threatens. If your business is insolvent, then you must act to ensure that you do not make the creditors’ situation worse. As a director of an insolvent company you have certain liabilities and responsibilities.
Contrary to popular misconception, you do not have to be a registered director in order to be held responsible for acting in the best interest of creditors. If you actively participate in controlling the direction of company affairs, then you are also potentially accountable for ensuring that the company takes the necessary steps to deal with outstanding debts.
If you fail to uphold these responsibilities, you could be accused of wrongful trading and held personally liable for the loss to creditors.
If a creditor has served a demand requesting payment that totals more than £750 and you fail to make payment within 21 days, the creditor can petition court and your company could be formally placed into liquidation.
A responsibility to take action
Taking advice from Licensed Insolvency Practitioner is the best thing you can do to show that you’re taking legal steps to deal with your creditors. For example, by obtaining a voluntary arrangement or pre-pack administration you can postpone or completely avoid the end of your company and create a positive outcome for all stakeholders. However, if you cannot show that you are acting in the best interest of the creditors you could face severe penalties.
Directors can be penalised and held accountable for losses sustained if wrongful trading is proved. Wrongful trading can include trying to raise funds to repay debts by conducting dishonest transactions that you cannot fulfil. Other examples include trading on whilst insolvent when other reasonable directors would have taken the relevant steps to wind the company, entering into new contracts without sufficient funding, or using misleading/inaccurate information to obtain loans.
The directors of a company, and any administrator or liquidator that they appoint, is obliged to act in the best interests of all creditors as a whole. This means that you should not repay certain debts in favour of others. For example, if you choose to repay a personally guaranteed debt over other debts, then you could be accused of giving certain creditors preferential treatment. If you are found guilty of doing this, then the courts may reverse the repayments by ordering the repaid creditor to refund the payment to the insolvent company, or potentially find the directors guilty of misfeasance and order them to repay the payments to the company.
If you are the director of a company and fear that you may be trading whilst insolvent, the best advice would be to seek help from a Licensed Insolvency Practitioner. With the right guidance you may be able to avoid personal liabilities and facilitate the best possible outcome for your creditors.