Insolvency lawyers, directors' duties and liabilities ,insolvency advice, business names, prepak sales and other matters

Overview

The limited liability company does not provide anything like full protection for the entrepreneur.

The Companies Act 2006 ("CA") contains many criminal and civil liabilities affecting directors and others running a company even when there is no prospect of insolvency.

If your company enters the "twilight zone" - ie insolvency may be possible, yet only distant - the Insolvency Act 1986 ("IA") introduces a further raft of potential liabilities.

Imprisonment may be infrequent and a fine may be palatable (both criminal sanctions). However, civil penalties require repayment to the company of benefits obtained and or personal responsibility for its debts.

The expression "director" usually includes a shadow director, ie someone who gives the orders and is obeyed even if not appointed as a director. Typically also the law catches activities channelled through a director's relatives and other companies.

In normal times

Directors are liable in company law as trustees to restore to the company benefits they receive from improperly diverting opportunities to themselves. CA s176. Also, a director must not enter substantial transactions with the company without shareholder approval (CA s190) and observing the articles of association. These and many other provisions apply in the run up to and during insolvency as well as when insolvency is not in prospect.

In the twilight

Directors must be vigilant not to trade if there is no reasonable prospect of the company avoiding insolvent liquidation. IA s214. Otherwise they face having to make a contribution to the company's assets to reduce the shortfall ultimately received by the company's creditors.

Directors who facilitate a transaction between the company and someone connected with it by way of gift or at an undervalue in the two years preceding the onset of insolvency (only 6 months if with someone unconnected) can be ordered to make payment to restore the company's position. IA s238

Note: Altmore Business Law are specialist insolvency lawyers and thus able to offer insolvency advice at the highest level.

Prepaks

Here negotiations are held and a sale of a significant asset of the company, eg its business, is prepared so contracts of sale can be entered into by a company's administrator on or immediately after his appointment.

Here the administrator, although appointed as custodian officer of the company under the Insolvency Act 1986, does not get to operate the asset, negotiate terms of sale, or obtain creditors' prior approval.

There can be many business benefits in opting for the prepak route but directors must take care, especially given that the company is in the twilight zone, and especially if they have an interest in the purchaser. For example

  • Obtain independent advice of own duties/ liabilities
  • Get asset independently valued
  • Ensure purchaser has independent management and advice (if possible)
  • Negotiate hard and keep records
  • Justify why sale as a prepak is best for creditors
  • Be transparent

The Association of British Recovery Professionals published its 16th Statement on Insolvency Practice in January 2009. This provides further guidance.

Business name; prohibited name

A recent court case in Scotland reminds us of a pitfall for people who get involved with a business that trades with a name similar or identical to one used by a predecessor company of which they were directors if the predecessor goes into insolvent liquidation. IA s216.

The director can be made personally responsible for the debts of the successor business incurred while he is involved in its management for up to five years from the time of the predecessor's liquidation, unless permission to use the name is obtained from the courts. IA 217.

Advice

Come and see us if any of the above prompts interest or concern about a transaction or matter whether past or planned.

Altmore Business Law are specialist solvency lawyers and are able to offer insolvency advice at any level.

Go back

Subscribe to our RSS feed