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What can go wrong for the directors on insolvency?

For most company directors insolvency is not something that they have experienced before.

For most company directors insolvency is not something that they have experienced before. They may be worried and unfamiliar with what will happen and what they could be liable for personally.

In fact, most directors have nothing to worry about. For example, the cases of directors being disqualified are extremely rare. 

However, there are a number of issues directors need to be very aware of including:

Overdrawn loan accounts: this is where the director owes the company money. This may be because they have been drawing money out in advance of taking a dividend at the year end. These funds will have to be repaid.

Dividends: these can only be paid out of accumulated profit. If the company is making losses, the directors should take their market value remuneration as salary through PAYE. They will have to pay ‘illegal’ dividends back.

Undervalue transactions: in the period prior to insolvency all transactions should be at market value. A liquidator can reverse these undervalue transactions and ask for any funds to be repaid.

Fraudulent trading: this is where the directors have set up a company with the sole intention of defrauding creditors. Fortunately, these cases are rare.

Misfeasance: the directors have a duty of financial responsibility towards their company. This is a catch all clause to restore funds due to a company from the directors. 

Wrongful trading: this is where the directors should have known better and stopped trading sooner than they have. They can be liable for all of the company debts built up after the point of no return. 

Preference payments: all creditors should be treated equally, and no creditor preferred (paid) above another. A preferred creditor can be asked to repay the funds.

Directors who are facing company insolvency should take professional advice early on. The more they know about what can and cannot be done the better. The longer they leave it the worse it gets.

If you are concerned about any of the above issues or for more information and advice, please contact me on 01392 474303 or david@kirks.co.uk.

David Kirk

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David Kirk ACA FABRP

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David Kirk

Licensed Insolvency Practitioner