Understanding the dangers of trading while insolvent
Inattentive directors are putting their companies at risk
When a company – for whatever reason – encounters financial difficulties it is vitally important that the directors act quickly. If the company is seen as trading insolvently it may lead to accusations of wrongful trading, or the more serious charge of fraudulent trading, where it is thought that the directors have deliberately attempted to deny creditors what they are owed.
Many of our members and their clients have seen companies go into liquidation and then simply disappear, owing them money which is never recovered. The use of ‘pre-pack’ administration has also increased the feeling that creditors can rarely do anything about their debts.
However, a recent case, which was subject to an updated press release in June 2017 by The Insolvency Service, emphasised that the agency does investigate companies that have been subject to a compulsory liquidation. This article seeks to recap on the implications for directors and the company accountants.
The case involved a garage owner who was disqualified for trading while insolvent. The director was disqualified from acting as a director on 23 June 2015 for seven years for trading to the detriment of creditors between 25 January 2013 and 14 August 2013 while his garage repairer and MOT specialist group of businesses was insolvent, incurring further liabilities of £106,097, including £89,134 to the Crown for PAYE/NIC and VAT. The director also personally benefited by causing £107,200 in transactions to the detriment of creditors from 25 January 2013 to June 2013.
The company was incorporated on 16 October 2012. It traded from three separate locations in and around Cardiff. The company was subject to a creditors’ voluntary liquidation on 14 August 2014 and had an estimated deficiency of £373,803. The disqualification followed an investigation by The Insolvency Service and culminated in the director giving an undertaking to the Secretary of State for Business, Innovation and Skills, which prevents him from becoming involved in the promotion, formation or management of a company until 2022.
The Chief Investigator of the Insolvency Service commented: ‘In investigating insolvent companies, the Insolvency Service always looks very closely at individuals who demonstrate a disregard for creditors and appropriate action is taken where wrongdoing is uncovered.’
Although the original case was from 2015, the fact that an updated press release was issued in June 2017 appears to show that the service wants to make it clear that its investigations are effective.
What does The Insolvency Service do?
The Insolvency Service administers the insolvency regime, investigating all compulsory liquidations and individual insolvencies (bankruptcies) through the official receiver to establish why they became insolvent. It may also use powers under the Companies Act 2006 to conduct confidential fact-finding investigations into the activities of live limited companies in the UK.
In addition, the agency authorises and regulates the insolvency profession; deals with the disqualification of directors in corporate failures; assesses and pays statutory entitlement to redundancy payments when an employer cannot or will not pay employees; provides banking and investment services for bankruptcy and liquidation estate funds; and advises ministers and other government departments on insolvency law and practice.
In The Insolvency Service’s register of directors if they got disqualified in the last three months, including details of why they were banned.
Also remember that there are other implications from the disqualification of a Director. Among other things, they cannot:
sit on the board of a charity, school or police authority
be a pension trustee
be a registered social landlord.
It is also worth noting that a person can be prosecuted and become personally liable for the company’s debts if they carry out company business on the instructions of someone who’s disqualified. It is therefore important for other directors – or indeed ACCA members – not to get involved in seemingly straightforward transactions where they are acting on instructions from others who are disqualified.
Advice for members
When a member first becomes aware of a client company’s financial difficulties, it is essential that they remind the directors of their legal responsibilities and the implications for them personally if they do not act quickly to protect themselves and the company creditors.
The most important advice to give is that the directors need to see a licensed insolvency practitioner as soon as possible. They can help assess the position to help avoid the company trading while insolvent. In addition to disqualification, directors may face the prospect of being held personally liable for the debts of the company; what they cannot do is simply assume that there will be no implications to them or the company if it fails and therefore take no advice or action.
There can often be issues that directly involve the accountants of an insolvent company. Under sections 235 and 236 of the Insolvency Act the liquidator of a company can require a variety of people connected with the company to provide information to them. Normally the accountant would not be an officer of the company, but under the Act they may be classified as such depending on what services they performed.
For instance, if the accountant did the bookkeeping/preparation of the accounts then they may be required to provide detailed explanations of transactions and entries in the accounting records, which may be problematic. If a member gets such a request it is important that they contact the ACCA members’ Technical Advisory team on 020 7059 5920 to discuss their response.
Please follow the links below for more information: