A company is generally considered insolvent when it can’t pay its bills as and when they fall due or if its liabilities are greater than the value of all its assets. Legally, the directors of a company are required to act in the best interests of its creditors. Failure to do so could result in accusations of Wrongful Trading, Fraudulent Trading or Misfeasance leading to a Disqualification as a Director following an Insolvency procedure.
Whilst this is very rare, any director found guilty of Wrongful Trading could also face personal financial penalties, be ordered to contribute to the company’s assets, and be disqualified from acting as a director or being involved in the management of any limited company for a period of up to 15 years.
More directors were disqualified in the first 3 months of 2016, then at any time in the past 6 years. The Insolvency Service secured 390 director disqualifications in the first 3 months of 2016, an increase of 56% on the same period in 2015 and the highest quarterly total since 2010.
The Department of Business Innovation and Skills (DBIS) examines various aspects of performance when deciding whether or not a director should be disqualified for unfit behaviour. The following tips from the DBIS site are there to help directors avoid disqualification as a result of insolvency:
- Practice Responsible Accounting and Reporting – It’s always good to keep thorough documentation of all expenditure and income, as this information could protect you from being accused of wrongful trading.
- Remember Companies House – Submit annual accounts and reports to Companies House on time.
- Communicate and Negotiate with Creditors – Failure to respond to a creditor or comply with their requests could be seen as an act of misconduct. Be sure to maintain continual communication with creditors, and if dialogue breaks down then seek the advice of a Licenced Insolvency Practitioner who can help.
- Cease Trading During Insolvency- If you continue to conduct business knowing that there is no realistic prospect of being able to repay debts then you’re putting yourself in the position to be disqualified. In particular, DBIS will be looking for excessive salaries and drawings taken out while the company was insolvent.
If you have any worries about the financial affairs of your company it’s important to take advice from your accountant or a Licensed Insolvency Practitioner. You can’t be criticised for taking expert advice but you certainly could if you don’t. At Poppleton & Appleby we don’t charge for an initial consultation, so don’t delay getting in touch for some expert advice.