Being a company director involves certain duties and responsibilities that continue until the moment you resign your position in the company.
As a director of a limited company, you must follow the company’s rules, shown in its articles of association, keep company records and report changes, file your accounts and your company tax return, pay corporation tax, and tell shareholders if you might personally benefit from a transaction the company makes.
You can hire other people to manage some of these things day-to-day, such as an accountant or operations manager. But at the end of the day, you are still legally responsible for your company’s records, accounts, and performance.
During an insolvency procedure, such as a creditors voluntary liquidation, standard practice dictates for an investigation to be launched into the conduct of the company director covering the events leading up to the liquidation. This is to provide a guarantee that the company director acted in the best interests of the limited company and fulfilled all legal responsibilities.
What is a preference payment?
If the company director shows preferential treatment to selected creditors, this may indicate a conflict of interest to the disadvantage of creditors which are first in line to receive repayments. The Insolvency Act 1986 lays out a priority order for creditor repayments in the event of company liquidation. Failure to abide by this could result in the referral of your investigation to the Department of Business, Innovation and Skills (BIS) who will be responsible for delving further into your case.
If you choose to make a preference payment with the knowledge that you are unable to treat remaining creditors in the same way, you may be guilty of showing preferential treatment to the detriment of other creditors. During company liquidation, secured creditors are first in line to receive payments as they have a legal right to your property or assets. A preference payment can also refer to the transfer of company assets, such as property.
If it is judged that you treated creditors unfairly by making a preference payment, the recipient may be ordered to return the money.
What is a transaction at undervalue?
If your business is contingently insolvent or insolvent with a strong chance of achieving recovery, company administration may be an option for asset-rich companies. During company administration, company assets may be sold to raise cash to settle creditor debts. If any assets are sold at a discounted price, this could drastically reduce the funds available for creditor repayments, resulting in a breach of your responsibilities as the company director.
What is fraudulent trading?
Trading in a fraudulent manner is a criminal offence, whereas wrongful trading. i.e., trading while the business is insolvent is a civil offence. To prove that the company director has acted fraudulently, it must be shown that the director intentionally defrauded creditors. For example, if the company director continued to accept payments for orders knowing the business could not afford to deliver goods or services, this could be classed as fraudulent trading.
What are the repercussions of breaching director code of conduct?
There are a series of actions which can be enforced if you are found in breach of your duties or acting wrongfully.
If you’re involved in disqualification proceedings, you could be banned from being a director of a limited company or even involved in the running of a company, for anywhere between 2 and 15 years.
In addition to being subject to a range of disqualification restrictions, your details will be published online on GOV.UK and if you are found to breach your restrictions, you could be fined – or worse still – sent to prison for up to 2 years.
You could even be held personally liable for the debts of the business. If the amount owed is a substantial sum, this could push you into bankruptcy, or sequestration (Scottish bankruptcy). If you have an overdrawn directors’ loan and your business is struggling as a result, you could be held accountable for the entirety of the debt by acting falsely.
If your business is struggling during these unprecedented times and is likely to become insolvent, any action taken should be carried out with creditor interests in mind. If you are worried then contact us at help@lucasross.co.uk for a free, informal, and confidential chat
