Directors Responsibilities
Introduction
This page is designed to give Company Directors an overview as to their responsibilities associated with being a director of a limited company experiencing financial difficulties
As a director, the law says it is up to you must keep control of the company and to seek assistance if necessary. Directors of limited liability companies are personally liable for the debts of a company if trading continues after there is no longer any reasonable prospect of avoiding insolvency.
To assist directors in dealing with a potential crisis the following guidelines should be followed:
- Avoid incurring further credit unless you believe that the company can pay for the goods or services ordered
- If assets are disposed of ensure that market value is achieved
- Do not seek to pay one creditor in priority to another
- Continuing to trade whilst the company was insolvent
- Always Keep proper accounting records
- Always Pay Crown taxes on time
- Always submit returns and accounts to Companies House on time
- Always submit tax returns on time
The following will explain potential liabilities that may arise due to either wrongful trading fraudulent trading, preferences, transactions at an undervalue or misfeasance.
As a director you may have considered your actions were justified at the time and you may be able to defend that position.
Directors should never ignore the problems hoping they may go away.
Common Questions
- What is Wrongful Trading?
- What is a Director or
Shadow Directors defence?
- What is fraudulent
trading?
- What is a preference?
- What is misfeasance?
- What is a transaction at an undervalue?
What is Wrongful Trading?
When sometime prior to winding a Director or Shadow Directors knew or ought to have known there was no reasonable prospect of avoiding Insolvent Liquidation.
- What are the signs?
- When the Director or Shadow Directors acted unreasonably or negligently by entering in to contracts with knowledge of the companies affairs and avoiding the facts.
- How can it be proved?
- When the Director or Shadow Directors act outside the expected reasonable standards of skill, knowledge and experience - This is known as the objective test.
- If the Director or Shadow Directors in question possess professional qualifications they must meet expected standards - This is called the subjective test.
What is a Director or Shadow Directors defence?
That the person took every step to minimise potential loss.
- What is the penalty?
The Director or Shadow Directors have to make a contribution, without limit from personal funds, as the court sees fit. This is to enable compensation, not to punish those concerned. - There is also the likelihood of a directors disqualification for up to 15 years.
What is fraudulent trading?
This is the carrying on of the business of a company with the intention to defraud creditors.
- What are the signs of fraudulent trading?
- Large unexplained profits/losses
- Actions and transactions by officers of the company when they know there are insufficient funds
- Taking orders and deposits when they cannot be fulfilled
- Playing one bank off with another - this is known as "cross firing"
- Large variations between balance sheet and actual figures.
- What is the penalty?
- The Director or Shadow Directors have to make a contribution, without limit from personal funds, as the court sees fit. This is to enable compensation and also to punish those concerned.
- Fines for this offence are limitless & imprisonment is possible for up to 7 years.
What is a preference?
This is when companies put certain creditors in a better position than other creditors thus improving their financial position.
- How is it proved?
- The company must be insolvent or rendered insolvent through the preference.
- There must be a desire to prefer a creditor.
- The company must be influenced by the desire to place the creditor in a better position than they would otherwise have been.
- What is the relevant period for a preference to be proved?
- 6 Months previous to the liquidation if the person is unconnected
- 2 years previous to the liquidation if the person is connected.
What is misfeasance?
This is when an officer / insolvency practitioner / manager / promoter of a company breaches the duty of care that is owed. Any one who breaches their duty is in breach of their "fiduciary duty".
- What happens if it is proved?
- The position has to be completely restored to the situation it was prior to the act.
- Contribution by the directors by way of compensation.
What is a transaction at an undervalue?
This is when a transaction entered into by the company has resulted in the company receiving significantly less consideration than it should have done.
What is the relevant period for a transaction at an undervalue to be proved?
- 2 years counting back from the date of liquidation. This period is the same whether the parties to the transaction were connected or unconnected.
- The company must be insolvent or rendered insolvent by the transaction.
