With the EU-phoria of the World Cup journey dissipating and the long and twisting road leading to Brexit ahead, Tony Sampson Consultant Solicitor and Insolvency Practitioner at Keystone Law issues a timely warning about the importance of keeping on top of cashflow in what could be turbulent seas ahead.
The benefits of being a director of a limited company are many. It isn’t just the tax benefits but rather the personal protection given to directors by the corporate veil surrounding limited companies.
That corporate veil means that directors’ liabilities for the debts of the company are limited to the extent of their shareholding (which could be as little as £1). In the UK this concept (outside insolvency) is sacrosanct and protected by the courts.
However, if a company is going into liquidation or administration that protective veil can slip and the directors can find themselves personally liable for the various company debts and financial consequences of their actions. Actions which, outside insolvency, could be seen as relatively innocuous in the rough-and-tumble of commerce.
So, when financial issues arise for a company — perhaps caused by the loss of a major client or unusually bad trading conditions — every director should stop and carefully consider their position by carrying out the three Cs test:
- Consider their Company’s situation
- Consider their Creditors’ position
- Consult Competent insolvency lawyers
Failure to follow these checks could mean heavy financial penalties for the directors as well as picking up the professional fees for the Insolvency Practitioners and their lawyers.
If company directors realise that their company is failing and is likely to go into liquidation, they need to stop and consider their position — otherwise they may be liable for the company’s debts for wrongful trading (continuing to run a company when it is clearly heading for liquidation). Directors should also check whether the dividends they have been drawing are out of the company’s profits. If not, they may have to pay them back.
Directors should take care when starting a new company — transferring assets and contracts to the new company from the old one could lead significant costs for misfeasance (for breaching those special fiduciary duties directors owe to their company). They should also be careful when using a former company name and extra care should be taken so they don’t afford themselves preferential treatment over other unsecured creditors when repaying company expenses.
Such claims emphasise that company directors and their companies are regarded as completely separate entities by the law — the issues can be resolved —but they do not want to risk losing that corporate veil and with it substantial sums of money.
Our insolvency and legal system is largely geared to the protection of creditors and the actions of directors will be considered in the context of how they protected their company’s creditors — a duty enshrined in the Companies Act.
So, how can directors’ personal positions be protected and how can they secure the money that they have invested in the company, especially if it is in trouble?
Whatever problems a company is experiencing, the key is to act quickly.
Sadly, all too often the warning signs are ignored and companies carry on regardless — in many cases expecting that if they invest more of their own money they can ‘trade through’ the crisis; to plug the financial holes they may also stop paying their own suppliers or HMRC, or they may do nothing except bury their heads in the sand.
But, if companies are in trouble or even just starting to see problems on the horizon, the directors should seek professional insolvency advice immediately. It may be an awkward board meeting and it may be embarrassing to tell family and friends that the company is in trouble, but in many cases those companies that act quickly are saved and turned around, and financial positions are protected.
Directors may have to ultimately liquidate the business, but the sooner they act, the more options they have and the less they will lose.
They may even get to keep the car!
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T: 020 3319 3700
E: Send an email to Tony