Winding down your company properly is now more important than ever before. The past 18 months have seen many changes to our insolvency legislation, and the latest bill to be introduced - the ‘Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill’ - may have some of the largest implications for directors of all of the legislation that has been introduced recently.
Directors’ duties
Directors are expected to act in a manner that promotes the success of the company – that is their overriding, fiduciary duty. There is not yet any qualification for someone to be a director of a company, but the Companies Act does state that directors are expected to exercise independent judgment and reasonable skill, care and diligence, with the latter being enhanced by any additional skillsets that the director may have.
When a company becomes insolvent, the director’s duties turn to stakeholders as a whole, not just the shareholders, and the director must ensure that every stakeholder is treated equally, to minimise any potential loss.
Consequences of a breach of duty
When a company enters a formal insolvency process (with the exception of Voluntary Arrangements), the Insolvency Practitioner is required to submit a report to the Insolvency Service on the director’s conduct leading up to the company in question entering that insolvency process. This is in accordance with the Company Directors Disqualification Act (CDDA) 1986. Should the Insolvency Service deem that the director’s conduct contributed to the demise of the company, they can instigate proceedings against the director, which can result in them being disqualified from acting as a director, or, directly or indirectly being concerned/ taking part in the promotion, formation or management of a company without permission from the court. The term can be anything from two years up to 15 years, in the most extreme cases.
This is in addition to any claim that an officeholder may have against the directors personally.
New powers for the Insolvency Service
The new Bill now provides for amendments to be made to the CDDA so that it also encompasses directors who were previously directors of companies that have been struck off the Register. The aim is to capture those directors who avoid the formal insolvency process on the basis that they can then avoid disqualification.
This measure has been introduced to assist with the potential for directors to strike off their companies after benefiting from the Bounce Back Loan Scheme but without repaying the monies. It is also hoped that the changes will go some way to reducing the number of companies that are struck off the register with creditors still outstanding.
What does that mean for directors?
There is now an increased risk from striking off your company at Companies House – there has always been the ability to restore a company however there is no longer any need to do this to investigate the directors’ conduct. This is why winding down your company properly is now more important than ever before.
Members’ Voluntary Liquidation
By placing your company into a Members’ Voluntary Liquidation (“MVL”) when your business has come to the end of its lifecycle, you can ensure that the wind-down is managed correctly and in line with your directors’ duties. The MVL Liquidator will deal with the final stages of closure (such as tax clearance and dealing with any outstanding creditor claims), giving you peace of mind that the company is wound down appropriately.
Insolvent Liquidation
If the company has debts that are not capable of being met from the assets and it is insolvent, then there is the Creditors’ Voluntary Liquidation route. Again, the Liquidator will ensure that the steps to wind down the company are dealt with appropriately.
Seek advice early
We always recommend that you seek advice sooner rather than later, if only to mitigate any potential issues with regards to your duties as a director later on in the process.
If any of the above resonates with you, please contact Daryl Warwick, on 01228 690187 or email darly.warwick@armstrongwatson.co.uk.
