What are Directors’ responsibilities at Insolvency?
When a company becomes insolvent, an Insolvency Practitioner is normally appointed to look after the interests of the creditors, with the outcome usually being either a Company Voluntary Arrangement, Administration or Liquidation. The focus is now on the best interests of the creditors and there are a number of things that directors must do and beware of at this stage. Three of the most important are: continue to fulfil their duties as directors, avoid overdrawn directors’ loan accounts and be wary of personal guarantees. Falling foul of any of these can have serious consequences.
Directors' Duties
Insolvency Practitioners have to make a report to the Insolvency Service about insolvent companies they are appointed to. If the Insolvency Service has reason to believe that the insolvency was caused by a director(s) not carrying out his/her responsibilities correctly, then they will investigate. The outcome of such an investigation can be director disqualification and/or personal liability for the company’s debts.
Directors' Loan Accounts
In our experience, Directors’ Loan Accounts (DLA), and how and when one can be used, is a complex area and often not fully understood by directors, especially in the SME sector. To put it simply, an overdrawn DLA must be repaid by the director(s), either by dividend or actual cash injection, within a set time period to avoid a big tax payment. However, if the company becomes insolvent and there are outstanding overdrawn DLAs, then the director(s) will be expected to repay them personally, with a Director Disqualification investigation and/or a Liquidator’s claim also being a possibility.
Anecdotally, it is commonly accepted in the Insolvency profession that between 75% and 80% of business insolvency cases involve overdrawn director loan accounts. Directors should always take advice from their accountants in this area.
Personal Guarantees
A Personal Guarantee is a legally binding agreement between a business owner and a lender to help the owner access finance. The Guarantor (often a company Director) agrees to be personally liable for the loan if it cannot be repaid or the company becomes insolvent. Such loans include commercial business loans, invoice finance, bank overdrafts and commercial rent payments.
If the company is unable to pay the debt and thus fulfil its obligations to the lender, the lender can then sidestep any formal insolvency process the company may enter (as well as limited liability protection) and look to recover the debt from the Guarantor personally, by calling in the Personal Guarantee.
This can result in personal assets such as your home, car, savings, and investments can be used to settle the business’s debts which could cause significant financial problems, or, in the most severe cases, bankruptcy. As with overdrawn Directors’ Loan Accounts, outstanding Personal Guarantees at insolvency are a common occurrence that can have serious consequences.
Insolvency FAQs
We detail below answers to questions you might have about the meaning of some of the terms you may come across in insolvency proceedings. Please note that this glossary is for general guidance only. Many of the terms have a specific technical meaning in certain contexts that may not be covered here.
References to ‘IP’ refer to a Licensed Insolvency Practitioner
Cancellation.
Anything that belongs to the debtor that may be used to pay his/her debts.
A procedure was introduced on 1 April 2004 whereby a bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them or give an undertaking to the Secretary of State which will mean that bankruptcy restrictions continue to apply after discharge for a period of between two to fifteen years.
Security interest taken over property by a creditor to protect against non-payment of a debt (such as a mortgage).
An Act of Parliament about the disqualification of directors.
Winding up of a company after a petition to the court, usually by a creditor.
Every person liable to contribute to the assets of a company if it is wound up. In most cases this means shareholders who have not paid for their shares in full.
Someone owed money by a bankrupt or company.
A document in writing, usually under seal, issued as evidence of a debt or the granting of security for a loan of a fixed sum at interest (or both). The term is often used in relation to loans (usually from banks) secured by charges, including floating charges, over companies’ assets.
A person who conducts the affairs of a company.
A procedure whereby a person has a court order made against them or gives an undertaking to the Secretary of State which makes it an offence for that person to be involved in the management or directorship of a company for the period specified in the order (unless leave has been granted by the court).
Any sum distributed to unsecured creditors in an insolvency.
A charge held over specific assets. The debtor cannot sell the assets without the consent of the secured creditor or repaying the amount secured by the charge.
A charge held over general assets of a company. The assets may change (such as stock), and the company can use the assets without the consent of the secured creditor until the charge “crystallises” (becomes fixed). Crystallisation occurs on the appointment of an administrative receiver, on the presentation of a winding-up petition or as otherwise provided for in the document creating the charge.
An agreement to pay a debt owed by a third party. It must be evidenced in writing for it to be enforceable.
Applies to companies or partnerships. It involves the realisation and distribution of the assets and usually the closing down of the business. There are three types of liquidation – compulsory, creditors’ voluntary and members’ voluntary.
The Official Receiver or an insolvency practitioner appointed to administer the liquidation of a company or partnership.
A person who has agreed to be, and is registered as, a member of a company, such as a shareholder of a limited company.
An IP who conducts the preparatory work for a voluntary arrangement before its implementation.
A director, manager, or secretary of a company.
An officer of the court and civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory company liquidations.
An individual or corporation.
A formal application made to a court.
A creditor who is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. These creditors include occupational pension schemes and employees.
A statutory form completed by a creditor in a compulsory liquidation to state how much is claimed. The form is supplied by the Liquidator.
OR/IP appointed to preserve a company’s assets pending the hearing of a winding up petition.
Instead of attending a meeting, a person can appoint someone to go and vote in their place – a ‘proxy.’
Form that must be completed if a creditor wishes someone else to represent him or her at a creditors’ meeting and vote on his or her behalf.
When a company is being wound up or in bankruptcy proceedings, the Official Receiver may at any time apply to the court to question the company’s director(s) or any other person who has taken part in the promotion, formation or management of the company or the bankrupt.
Realising an asset means selling it or disposing of it to raise money, for example to sell an insolvent’s assets and obtain the proceeds.
The commonly used name for an administrative receiver. The term can also mean a person appointed by the court or with the power to receive the rents and profits of property. Receivers who are not administrative receivers do not need to be insolvency practitioners.
A company in administrative receivership is often said to be “in receivership.”
A procedure that cancels a winding-up order.
The process by which the Official Receiver or an insolvency practitioner is discharged from the liabilities of office as trustee/liquidator or administrator.
The Secretary of State for the Department of Business, Innovation & Skills
A creditor who holds security, such as a mortgage, over a person’s assets for money owed.
A person who, without being formally appointed, gives instructions on which the directors of a company are accustomed to act.
A document sworn under oath, completed by a bankrupt, company officer or director(s), stating the assets and giving details of debts and creditors.
An IP appointed to supervise the carrying out of a company voluntary arrangement.
Transfer of Undertakings (Protection of Employment) Regulations 2006.
United Nations Commission on International Trade Law.
A creditor who does not hold security (such as a mortgage) for money owed. Some unsecured creditors may also be preferential creditors.
A method of liquidation not involving the courts or the Official Receiver. There are 2 types of voluntary liquidation – members’ voluntary liquidation for solvent companies and creditors’ voluntary liquidation for insolvent companies.
An Order of a Court, usually based on a creditor’s petition, for the compulsory winding up or liquidation of a company or partnership.
