By guest author Shaun Barton of Company Closure.

Company directors are also responsible for overseeing the welfare of their employees and ensuring that the company fulfils its filing and other statutory obligations. Directors’ responsibilities change if their company slips into insolvency, however.

Director responsibilities in insolvency

Prioritising creditor interests

When a business is solvent, directors prioritise the interests of the company by promoting its success for the benefit of its members as a whole. Conversely, when a company becomes insolvent, creditor interests must be placed to the fore to minimise their financial losses.

Part of this responsibility involves being aware of the financial status of the company at all times so that a director can take the necessary action if it slides into insolvency. The action they must take is to cease trading and seek assistance from a licensed insolvency practitioner.

Ensuring equitable treatment of creditors

Creditors must be treated without preference, which means that directors cannot favour one creditor over another – by repaying a loan that has a personal guarantee attached, for example.

Preference payments are a serious breach of a director’s responsibility to all creditors when their company is insolvent and can lead to serious repercussions including director disqualification.

Statement of Affairs

Directors must produce a statement of affairs if an insolvency practitioner is appointed voluntarily by the directors to close the insolvent company. If the company has entered compulsory liquidation by order of the court, the Official Receiver will typically prepare the document.

A statement of affairs sets out the company’s financial situation and typically includes a valuation of assets, a balance sheet, details of employees, creditors, and other stakeholders, as well as information on the debts owed by the business.

Cooperation with the office-holder

A key responsibility for directors in this situation is to cooperate fully with the appointed office-holder. This typically involves providing all the documentation and information requested.

The directors are also typically required to attend an interview. The main aim of the interview is to establish how the company declined and whether director actions contributed to it or to creditor losses.

What if directors do not fulfil these responsibilities when insolvent?

The ramifications of failing to carry out these requirements are serious for directors. Depending on the issue, they could be disqualified for anywhere between two and fifteen years, held personally liable for the company’s debts, and in the most serious cases, receive a prison sentence.

Director misconduct and disqualification

If any wrongdoing is uncovered leading up to or during the company’s insolvency, such as making preference payments or concealing assets, a director can be disqualified under the Company Directors Disqualification Act (CDDA), 1986.

Personal liability for company debts

Directors may have failed in their responsibility to cease trading when the company entered insolvency, in which case, they place themselves at risk of being held personally liable – either for the additional losses suffered by creditors during this time or in some cases, all of the company’s debts.

Court action

Refusing to assist the office-holder can also lead to a court ordering compliance from a director or the compulsory seizure of the books and records if they are not readily handed over.

The responsibility to be aware of the company’s financial situation is a key responsibility that underpins a director’s role even when it is solvent. It is vital not to delay seeking assistance, therefore, even if the company is not yet officially insolvent. Doing so helps company creditors, but it also means that directors can avoid accusations of wrongful trading or other misconduct allegations.

Insolvency and debt investigations

Seeing the whole picture in insolvency and debt cases is key to maximising returns to creditors. For more information on how ESA Risk can help to identify hidden assets or locate targets who have gone to ground, contact Mike Wright, Investigations and Risk Management Consultant, at mike.wright@esarisk.com, on +44 (0)343 515 8686 or via our contact form.

You can also learn more from our Insolvency & Debt Investigations brochure:

This article was written by guest author Shaun Barton of Company Closure.