In the first quarter of 2013 there were 3,619 company liquidations in England, according to the latest figures from the government’s Insolvency Service. That’s 5.3% fewer than in the previous quarter, 15.8% fewer than in the same period of 2012 and about the same position as in 2005.
These figures exclude businesses that closed without entering a formal insolvency regime and where debts were too small or too few for it to be worth creditors taking action. “Zombie” companies on the brink of insolvency are also excluded.
Personal insolvencies were down too, back to levels last seen in 2008. But that excludes debt management plans and other informal arrangements between lenders and borrowers.
Some good news, then, for the economic recovery. And there were 2.6 million active registered companies, which puts into perspective the numbers being compulsorily wound up or put into creditors’ voluntary liquidation.
In each of these companies, the directors had duties that are set out in law – sections 170-177 of the Companies Act 2006. And where insolvency was a concern these responsibilities included a duty to consider or act in the interests of the creditors of the company.
Directors may be ordered by the courts to contribute to the company’s assets if they are made personally liable for particular transactions when scrutiny of their decisions suggests they contributed to or caused an insolvency – defined in a useful glossary of terms by Berley Chartered Accountants of London “as having insufficient assets to meet all debts, or being unable to pay debts as and when they are due”.
The key legislation here is the Insolvency Act 1986 and directors must be aware of the provisions concerning fraudulent trading, wrongful trading and breach of duty.
Fraudulent trading: Carrying on business with intent to defraud creditors, where the company is being wound up and an application to court has been made by the liquidator. This is a criminal offence and can lead to disqualification as a director and personal liability. Anyone concerned with a company, not just the directors, may have to face the consequences.
Wrongful trading: Personal liability and disqualification are the possible sanctions for a director where a company continues to trade having gone into insolvent liquidation, or where before winding up commenced a person knew or ought to have concluded there was no reasonable prospect of avoiding insolvency. Directors have a defence against this accusation if they took every step that ought to have been taken to minimise potential loss to the company’s creditors.
Breach of duty: A director or manager can be compelled to repay, restore or account for money or property where a court rules this has been misapplied or retained, that they have been guilty of misfeasance (doing a wrong thing or act) or a breach of fiduciary (acting in the best interest of the company at all times) or any other duty. [Suggested h2 heading:]
The to-do list for directors
Here are some top tips for directors who fear that their company may not avoid insolvent liquidation:
- ensure regular board meetings are called and fully report the decisions of directors in the minutes;
- ensure decisions are made by directors on the basis of available financial and legal information and advice;
- ensure that directors always have up to date financial information;
- monitor compliance with financial covenants in loans.
Should you become aware that there is no reasonable chance of escaping insolvent liquidation, then:
- tell the board of directors;
- take advice from independent lawyers and insolvency practitioners;
- avoid the company taking on further credit;
- discuss whether to cease trading and implement a formal insolvency procedure;
- minimise potential loss to creditors.
Can’t convince the other directors? Resignation may mean you avoid liability for wrongful trading but have your concerns minuted by the board, ensure independent advice is taken and put your concerns in writing to the board before you submit that resignation letter.
The to-do list above is not exhaustive so the key exhortation is, if in doubt shout it out – and ensure the minutes of any meetings record your views.