Borrowing more money to remain operational is usually not the solution to a difficult trading period. Trading out of financial difficulty is an extremely challenging process with pressures from creditors and lenders.
When a company is struggling to meet its liabilities for whatever reason the way forward is usually not to borrow more and incur more liabilities. This often occurs because the directors have not taken a realistic view of the prospects of the business and often with an overly optimistic view of orders or contracts.
This is understandable and only a business owner can understand the pain of closing a business which has taken such a lot of work and sacrifice to get off the ground.
It’s often a more sensible route to plan for a liquidation to eliminate a burden of debt and re-start the business on a level playing field. This can often be a more sensible route when the new entity can continue to provide goods or services without the burden of large amounts of debt.
This is more easily achieved than a lot of directors appreciate and encouraged by the UK insolvency legislation.
In the process of building a business a lot of directors are unaware of the consequences of things going wrong in your company.
A director of an insolvent company that knowingly will never be able to pay its creditors, in a timely manner, may be guilty of wrongful trading.
When a liquidator is appointed, directors no longer have control of the company or anything it owns and cannot act for or on behalf of the company. There can be harsh penalties for the directors if they allow the level of creditors to increase without good reason.
If the directors are deemed to be guilty of wrongful trading, they can be penalised and held accountable for the debts incurred. Additionally, the directors can be deemed unfit to run a business and disqualified for being a director for years.
Directors are required to give the liquidator any information about the company they require, hand over the company’s assets and allow the liquidator to interview them.
In relation to CBILS/BBLS loans, your company’s finances and your actions as a director will be closely examined by the liquidator. The liquidator has a duty to investigate the conduct of the directors for three years leading up to insolvency.
Here is a list of frequently asked questions. If you don’t find what you are looking for or need more information please don’t hesitate to contact us.
The most appropriate procedure will depend upon your own company’s particularly unique circumstances, but each procedure can, subject to expert guidance and advice, offer the following;
In most circumstances, the best and cheapest form of business rescue is to use the Liquidation procedure, as Liquidation does not mean the death of the core business. Using the insolvency process as a sword rather than a shield, the business can be transferred to a new ‘Phoenix’ company, which can continue the trading activities, but which is completely debt-free.
We will guide you through the whole Liquidation process, from the outset until the company is ultimately dissolved, helping you through the potential pitfalls, yet ensuring that, should you wish, that your core business survives with little or no impact. As part of our service, we will organise the smooth, legal transition of the business from the old, insolvent company to a new, debt-free Phoenix company.
As well as acting in the best interests of the company creditors during the period of insolvency, directors are legally obliged to cooperate with the official receiver or insolvency practitioner during the liquidation process. If you fail to comply with the official receiver’s requests then allegations of misconduct could be made that may result in an Insolvency Service investigation and penalties may apply.
Once an official receiver has been appointed to liquidate the company, they will send the directors a questionnaire to gather information about its assets and creditors. The directors will also be required to attend an interview where the reasons for the company’s insolvency and eventual liquidation will be discussed. At the interview, the official receiver will ask for:
• The completed questionnaire which is provided
• Company accounts, records and paperwork
• Full details of the company’s assets and liabilities
• Details of whether other parties are holding assets or trading records
You must answer the official receiver’s questions to the best of your ability. If you refuse to complete the questionnaire or attend the interview, the official receiver can forcibly seize records and request the court to compel you to do so.
The official receiver may also request assistance from the directors in selling the company’s assets. If there is an overdrawn director’s loan account then that will have to be repaid and personal guarantees may be enforced if the company cannot afford to satisfy its debts.
As a director of a company that has gone into insolvent liquidation, you’ll be banned for 5 years from forming, managing or promoting any business (including companies) with the same or similar name to your liquidated company.
If you need to satisfy debts to creditors from the old company in order to create a flow of products or services for you new company, then you are able to do this in certain circumstances. It is important though to consider the implications of this on the solvency of the new company.
Many businesses are weighed down by historical debt. The business and a limited company are two separate entities and are all too often confused and treated as one.
A Phoenix company is a new trading entity that arises from the ashes of an insolvent company. The Phoenix company carries on the business of the old, insolvent company, with virtually no difference, save that the phoenix company is free of debt and therefore in a much stronger financial position.
When a company enters liquidation, any assets it owns are sold by the liquidator to generate funds for creditors. Once all creditors have been repaid as far as funds allow, any remaining debts are written off.
Unsecured creditors often receive a poor deal from an insolvent liquidation mainly because, as a group, they’re placed at the bottom of the statutory hierarchy for repayment. So in which circumstances can you become personally liable for some or all of your company’s debts?
There are various scenarios that could result in personal liability for directors during insolvent liquidation, generally centred on misconduct or some form of wrongdoing in office.
This could range from unknowingly placing creditors at greater risk of loss by continuing to trade, to making deliberate attempts to defraud or avoid repayment. Here are just a few examples:
Wrongful trading
Directors often believe they can improve their company’s financial position by continuing to trade, even when they’re insolvent. In reality, however, this can lead to creditors suffering further losses and this is unlawful.
This is called wrongful trading, and it means you’ve failed to place the interests of your creditors first, which is a legal obligation when your company has slipped into insolvency. In this case, you and other directors could become personally liable for these additions.
When a company enters administration or is liquidated, the conduct of directors leading up to insolvency will be investigated to find out if they have acted wrongfully or unlawfully. One type of transaction that comes under scrutiny in this situation is preferential payments.
It is incumbent upon directors to maximise returns for all creditors once insolvency is threatened – to do otherwise could be viewed as acting unlawfully. Directors must set aside their own interests and those of the company, and under the ‘pari passu’ principle, ensure that creditors within each class are treated equally as far as repayment/losses are concerned.
‘Preference’ occurs when a particular creditor is placed in a more beneficial position, to the detriment of the remaining creditors in that group. For example, repaying a loan from someone connected to the company, such as a director’s relative, or making sure that a creditor is paid simply to encourage an ongoing business relationship post-insolvency.
If a director has provided a specific lender with a personal guarantee, they might be inclined to repay this loan first to protect their personal finances. This too could be seen as a preference in insolvency. Preferences include the transfer of assets in addition to cash payments.
When deciding whether payments should be treated as preferential, consideration is given to the length of time between the transaction and the onset of insolvency. There are two aspects to this:
• If the transaction involved a ‘connected party’ such as a relative of the director, the timescale is two years before the onset of insolvency
• For non-connected recipients, the time limit is six months
The date of insolvency could be when the petition for an administration order is presented, the filing date of Notice of Intent to Appoint, or the date on which winding-up begins. If a company has struggled on for a period without actually becoming insolvent, a payment that was indeed preferential, could be overlooked simply because of the timescale.
Directors could face personal liability for some or all of the company’s debts if a preference is found to have been made. The insolvency practitioner will apply to the court for the transaction(s) to be set aside, and action may be taken against you.
If the preferential payment was made when the company was insolvent, or caused it to become insolvent, it could lead to disqualification as a director for a period of up to 15 years.
There are no easy ways to communication the difficulties a company may be experiencing to customers and creditors. The key messages depend on your plans and if you have decided to re-start the business with a clean financial position after eliminating accrued debts.
The general answer is that you can be a director of as many companies as you like at the same time. However, if you have been the director of a liquidated company, and you set up a new company it cannot have the same or a similar name to the old company. This is to reduce any confusion for creditors of the old company.
If you require further information about our services or if you have not found the answers you were looking for in our FAQ, please do not hesitate to contact us. Our team would be more than happy to assist you.
