Limited Companies and Directors Liabilities
27th August 2015
So, you’re the director of a limited company and things aren’t going so well. You decided to close the business, but that’s ok as the debts are the company’s, not yours, right? Unfortunately, this isn’t always the case – there are circumstances where company directors can be held personally liable for company debts.
The most obvious example of where a director is personally liable is in respect of personal guarantees (PGs). In these instances, it is not unusual for the creditor not to wait for dividends in a liquidation/CVA etc, but instead wholly rely on the PG. The liability is limited to a specific debt only and usually subject to a set maximum (detailed on the PG document itself).
For the purpose of this article, let us assume we are looking at company liquidations. Liquidators will examine the conduct of the company directors up to the point of liquidation and can bring claims against company directors under Insolvency Act 1986. Let’s look at the three key areas in turn:
- Fraudulent Trading – under section 213 of the Insolvency Act 1986, fraudulent trading is when a director carries on the business of the company with the intent to defraud the creditors of the company. In these instances, the liquidator can apply to the court for the director to make payment personally for an amount equivalent to the loss the company suffered as a result of his/her actions.
- Wrongful Trading – under section 214 of the Insolvency Act 1986, wrongful trading is when a director knew (or should have known) that there was no reasonable chance that the company could avoid an insolvent liquidation, and he/she failed to take steps to minimise potential losses to the company’s creditors. Like fraudulent trading, the liquidator can apply to the court for the director to make payment personally for an amount equivalent to the loss the company suffered as a result of his/her actions.
- Misfeasance – under section 212 of the Insolvency Act 1986, misfeasance is when a director has misapplied, retained, or become accountable for any company property. Claims for misfeasance can be brought by the liquidator, Official Receiver, creditors, or a “contributor” such as a shareholder, and can extend to third parties who knowingly assisted in the misfeasance (including professional advisers). In these instances, the misfeasance claim would be up to the value of the misappropriated property.
How do you as a company director ensure you do not fall foul of these potential claims? The Companies Act 2006 sets out the key duties of a director which is principally to act in the best interest of the company at all times and exercise reasonable care, skill, and diligence. In addition, a director must act in good faith and not put himself/herself in a position where their personal interests conflict with that of the company. As a Limited Company is a separate legal entity, a good analogy is that being a company director is somewhat similar to being the legal guardian of a child in many respects.
If you do have any concerns, I would always recommend being open and honest in the “pre-appointment” stage with your potential company liquidator. If this is not possible, speak to a good insolvency practitioner, lawyer, or insolvency specialist who may be able to assist.
Bankruptcy and Income Payment Orders (IPOs)
29th July 2015
In this article, we should look at another common element of personal bankruptcy (in England and Wales) called Income Payment Agreements/Orders – both ostensibly the same thing except the “agreement” is entered into voluntarily by the bankrupt and the “order” is made by the court. This falls under section 310 of the 1986 Insolvency Act.
Once the court has adjudged you bankrupt, the next step is your initial meeting with the Insolvency Service which is usually about two weeks later. Whether the Insolvency Service elects to deal with your case “in house”, or refer it to a licensed insolvency practitioner to act as Trustee in Bankruptcy, one of the things that will be scrutinised is your income and expenditure.
An assessment will be made with particular focus on what is “fair and reasonable” in terms of your expenditure. Once this is done, a calculation will be made to determine your “disposable income”. Clearly, suitable rent, food etc will likely be deemed as reasonable – however, “luxury items” such as holidays or pay TV subscriptions will not. It is also likely that any Additional Voluntary Contributions (AVCs) to your pension fund will also need to be suspended (there has been some legal precedents established recently in respect of pensions and you should seek proper advice if this is an area of concern).
At the time or writing, the “trigger” value for disposable income to result in an IPO is £20 a month. The Insolvency Service/Trustee in Bankruptcy will then ask you to sign an Income Payment Agreement at first (will likely apply to the court for an IPO should you decline) and this will run for 3 years. During this period, you have a legal obligation to inform the Insolvency Service/Trustee of any change in your personal circumstance – for instance, if you get a promotion or inherit a sum of money, this will be taken into account and fall under the remit of the IPO (it should also be noted that IPOs can go down as well).
To illustrate the point, if you are paying £50 a month for a pay TV subscription which is then deemed a “luxury”, this will go toward the IPO for 3 years resulting in you paying the Insolvency Service/Trustee £1,800 for this alone.
It should be noted that if you are discharged from your bankruptcy (usually automatic on the first anniversary of the order being made) without an IPO being made, one cannot be retrospectively applied.
This is clearly just a general guide and not to be taken as formal advice as every case is different. If you are considering bankruptcy and this is an area of concern, do please seek proper advice.
CASE STUDY – £1.8m personal guarantees settled for £20k
4th August 2015
Now I have your attention, I must stress that this is not representative of the sort of results we frequently get – I find it an interesting case study as it does highlight some interesting points in relation to personal guarantees (PGs) issued by the banks.
Generally speaking, banks have been issuing personal guarantees for a very long time now and they are usually pretty ironclad. Historically, arguments like “I didn’t get a chance to have Independent Legal Advice (ILA)” used to hold water, but these days most judges will rule that as a company director, your duty of care is to the company and so you should know what you are signing – caveat emptor!
What most people do not realise is that it is common banking practice to keep PGs on file, even after the debts have been repaid and the accounts closed. As a result, supporting documentation with bank PGs is highly important – to illustrate this point, having a charge over your home is not conclusive evidence that a mortgage exists.
In this particular case, the clients approached us with a £300k PG from one of the banks and engaged our services to negotiate a full and final settlement. Once we were engaged, further PGs were produced bringing the total to £1.8m. Once our authority was acknowledged by the bank, we requested copies of the PG documentation (to double check they have been drafted correctly) as well as the relevant facility letters and bank statements as proof of debt (there could have been a clerical error whereby a debt that was originally unsecured was being pursued under the PG – admittedly, this is highly unusual, but it nevertheless remains part of our due diligence process).
As anticipated, the PG documentation appeared to be in order and the relevant protocols appeared to have largely been followed in the execution (there were however some points of concern which meant that a challenge could be mounted on the validity of the PG in relation to one of the parties, but we felt that this alone would not be enough to set aside the bank’s claim – rather it could be used as leverage to negotiate a better deal for the clients). The problem was with the supporting documentation – after piecing together the facility letters, bank statements and PGs, it was not possible to reconcile the banks’ claim. The facility letters referred to PGs that were not provided/possibly didn’t exist. On this basis, we determined that should the bank attempt litigation, they could not adequately prove that a liability exists for our clients.
Given that there are no guarantees when it comes to litigation, we took the view that a full and final settlement “without acknowledgement of any liability on the part of our clients” would be in our clients’ best interest so that we could expedite a swift resolution. After lengthy negotiation with the bank stating our position, the bank conceded to our argument and agreed on a settlement of £20k.
Again, I must stress that this is not representative of the sort of results we frequently get. Every case is different and you would need to carefully analyse the financial etc in order to make a proper determination/recommendation. If in doubt, seek advice.