Top Insolvency Questions from Directors

Having worked in insolvency for many years, I’ve noticed that directors often share similar concerns when facing financial difficulties. Dealing with insolvency can be stressful and confusing, and certain questions tend to come up repeatedly. To help ease these concerns, here are the most frequently asked questions by directors regarding the insolvency process and their responsibilities.

What are my duties and responsibilities in an insolvency?

In the lead-up to an insolvency process, ensure you do nothing to worsen creditors’ positions, and avoid preferential payments, in other words, do not make payments out with the normal course of business like repaying a director’s loan or a preferred creditor and ensure you continue to fulfil your legal and reporting obligations.

Once in an insolvent process – cooperate with the Insolvency practitioner!

• You must provide all necessary information about the company’s affairs
• You must hand over the company’s books, records, and assets
• You must assist the insolvency practitioner in understanding the company’s financial situation

You will be required to provide a Statement of Affairs, which is a detailed statement of the company’s assets and liabilities.

You may be asked to attend a meeting of creditors and answer any questions they may have about the company’s trading and reasons for failure.

Will I be held personally liable for company debt?

Typically UK directors are protected from personal liability for company debts except in certain circumstances:

Personal guarantees

If a director has signed a personal guarantee for a loan or credit agreement, they are personally liable if the company cannot meet its obligations.

Wrongful trading

In terms of the Insolvency Act 1986, if a director continues to trade when they knew, or ought to have known, that the company was insolvent and had no reasonable prospect of trading out of the difficulties, this is known as Wrongful Trading and the director can be held liable for the debt incurred.

Fraudulent trading

The Insolvency Act 1986 makes it a criminal offence to trade with the intent of defrauding creditors, or for fraudulent purposes and can result in severe penalties which include personal liability for debt.

Misfeasance

If a director fails to act in the best interest of the company and breaches their fiduciary duties, for example, acting in bad faith or for personal gain, they can be held personally liable.

Can I continue being a director in a different company or start a new company in the future?

The short answer is yes, unless you have been disqualified as a director in which case you cannot be involved in the management, formation or promotion of a company during the disqualification period without specific court permission.

Must I repay my outstanding director’s loan to the insolvent company?

Again the short answer is yes. In any insolvency, the Insolvency Practitioner’s role is to realise all company assets for the benefit of creditors so they will request loans to be repaid. If you fail to repay your loan the Insolvency Practitioner may take legal action to pursue you for payment, which could include seeking your bankruptcy to recoup payment from your personal assets.

Will I be repaid the Director’s loan made to the insolvent company?

You can lodge a claim for your director’s loan. Unless the loan was specifically secured against company assets, you will rank alongside all other unsecured creditors and if there are sufficient assets to pay a dividend, you will receive the same pro rata’d divided as other ordinary creditors, after secured and preferential creditors have been paid.

Get in touch

Margaret Linn

Manager

I have 25 years’ experience working in Insolvency, both personal and corporate.  I advise individuals and company directors who find themselves in financial difficulty and am committed to finding a tailored solution that serves the…

Read more