The quick answer
As a company director, if you know the financial position is getting worse it is your responsibility to do something about it. The longer it goes on the more chance you have of being disqualified as a director.
Disqualification only applies if you were a director or shadow director.
In more detail
When a company goes into liquidation or administration, the insolvency practitioner appointed is under a duty to investigate what happened. A report has to be filed with the Insolvency Service in every case. This report will cover every director or shadow director and their conduct.
If the Insolvency Service deems the director’s conduct was unfit, they will apply for a disqualification order (directors ban) that can last up to 15 years. If you carry on being a director of another company during the period you are banned you may go to prison.
If the Insolvency Service decides to carefully review a company’s insolvency, they will usually visit the liquidator or administrator and review the records. They may also write to third parties to gather more information for a prosecution and disqualification proceedings.
The evidence they are looking for will include:
- Allowing a company to continue trading when it can not pay its debts.
- Not keeping proper company accounting records.
- Not sending accounts and returns to Companies House.
- Not paying tax owed by the company including VAT, PAYE and Corporation Tax.
- Using company money or assets for personal benefit.
Directors need to keep on top of the finances of their business and make sure it is profitable. This is particularly important if shareholder/directors take dividends instead of salary to save tax.
It is very important as well to keep accurate records and minutes of meetings especially if those meetings discuss whether to carry on trading or not. You will be asked to justify why you carried on trading if losses continued and the creditors position got worse.
It is always sensible to take professional advice early on as a protective measure.