Being a director of a company is a complex task and requires careful attention and a lot of work. The nature of the role does not get any easier when a company enters financial difficulty. A director must adapt to certain changes in their role triggered by insolvency and be aware of the potential consequences of not adhering to such changes.
This blog will briefly go through some of these changes and risks but for detailed help it is strongly advised to seek help from professionals in this area such as our expert corporate insolvency team at Lewis Nedas Law.
Directors’ duties and insolvency
In solvent times, directors have many duties which they must adhere to centred mainly around promoting the success of the company. However, during times of insolvency (or looming insolvency) this duty becomes secondary to a director’s new duty to act in the best interests of the company’s creditors.
This may at first seem odd, perhaps given that this duty to creditors is not so widely known, but does carry some serious consequences for the director(s) who fails to adhere to it.
The role of directors during insolvency
This change in focus of the duty of the director(s) of the company also changes the role the director(s) must play in the company. No longer should their main focus be on maximising the return for the company’s shareholders but rather ensuring that any creditors of the business receive a maximum return on the debts they are owed.
Directors must also ensure that they are aware of the company’s current financial position so that they know when the business is at risk of entering into insolvency so that they may act accordingly. Moreover, keeping a track of the creditors of the business is especially important during times of financial difficulty so that these can be dealt with in the appropriate manner.
The role of directors can be impacted when the company enters insolvency beyond just their duty to creditors becoming their overriding interest. For example, if the company is insolvent and enters into liquidation or administration, then the directors’ powers to run the company will be mostly handed over to the appointed liquidator/administrator.
Directors’ risks during insolvency
Although directors are not personally liable to pay any debts incurred by the company they act for, this does not mean that directors face no risks when a company enters into insolvency. In fact, failing to adhere to their duty to creditors during times of insolvency can have some serious personal consequences for directors.
Fraudulent trading
One such consequence that a director may face by failing to adhere to their duty to the company’s creditors during times of insolvency is a charge of fraudulent trading.
Fraudulent trading occurs when a director intentionally defrauds creditors of the company by continuing business and accepting credit which the director(s) knows the company will not be able to repay. For example, if a company is insolvent but the director(s) accepts a line of credit from a supplier which they know the company has no real prospect of being able to pay in order to continue trading, then this could constitute fraudulent trading.
Fraudulent trading is a criminal charge and is the most serious of charges which can be levied against a director in the insolvency process.
Fraudulent trading can carry the following punishments:
- an order to make a contribution to the assets of the company to help meet its debts,
- a disqualification from acting as a director for up to 15 years, and
- a prison term of up to 10 years.
Given the seriousness of these punishments, and in particular the potential for imprisonment, it is quite evident why fraudulent trading must be avoided at all costs by directors of insolvent companies.
Wrongful trading
Another potential charge which can be raised against directors of an insolvent company is that of wrongful trading. Wrongful trading is similar to fraudulent trading but does not require any fraud or dishonesty on the part of the director. It occurs when the director(s) continues to trade and amass debts when they know (or should have known) that there is no real prospect of the company being able to pay for this.
This is not a criminal charge but rather a civil charge, meaning that there is no possibility of imprisonment if the director is found to have traded wrongfully. However, the other penalties (disqualification and contribution to company assets) also apply under this charge.
Disqualification
As mentioned above, if found guilty of wrongful or fraudulent trading, a director can be disqualified for up to 15 years. This means that the director in question would not be able to act as a director for any company for this length of time.
Breaching a disqualification order is in itself a criminal offence punishable by up to 2 years in prison.
Contact our Insolvency Solicitors in Central London today
Given the severity of punishments which can arise if a director breaches their duty to creditors during insolvency, it is important that they act in accordance with the law and advice given.
Our insolvency solicitors at Lewis Nedas Law have the experience and expertise to help advise you if you find yourself in this difficult position. Contact us on 020 7387 2032 or fill in our online enquiry form to get help from our team.
