Insolvent companies and the pressures on directors

wooden figuresThe financial distress of a company places inevitable stress on directors. Mike Smith explains how to minimise the impact.

Every year, tens of thousands of companies across the UK face up to financial distress and corporate insolvency.

Behind each and every insolvency case, there will be a huge amount of pressure. Not just on company directors, but also on their partners and families.

And the smaller the company, the greater the negative stress tends to be on the individual.

The potential personal struggles faced could be with making mortgage repayments and paying household bills.There are also a number of other stresses and strains that take their toll on the director of a failing company.

The pressure associated with becoming insolvent

Company insolvency brings with it a number of responsibilities and obligations to act in a certain way.

Company insolvency can be defined in one of the following two ways:

  • having more liabilities, including contingent liabilities, than assets
  • being unable to pay debts as and when they fall due

Understanding exactly when a company has become insolvent can be a challenge in itself. It is usually characterised by:

  • delayed payments to creditors
  • breaching overdraft limits
  • creditors threatening legal action
  • PAYE/VAT arrears
  • formal action by creditors, such as statutory demands and county court judgements (CCJs)

If a director is concerned that their business has become insolvent, they should seek professional advice immediately. This can help to protect them against serious acts of misconduct, which in some cases, may be committed unknowingly. Typically, this includes wrongful trading, fraudulent trading, selling assets at undervalue and showing preference to certain creditors.

Simply having someone to talk to who has experience of corporate insolvency situations can also alleviate some of the pressures that directors face. 

Wrong or bad advice

Everyone has had well-intentioned but ultimately unhelpful advice at some point in their lives. Unfortunately, bad advice can have disastrous consequences for an insolvent company. A recent case illustrates the point.

A director called to say that he had taken advice from an accountant who was not an IP about a potential VAT compliance audit. The accountant handled the matter over several months. Cutting a long story short, the company went into compulsory liquidation, and a personal liability notice of £70,000 was issued to the director. To make matters worse, the director now faces the prospect of a director ban as, unbeknown to him, he breached several insolvency laws.

Thankfully, this is unusual. But having viewed the details of the case, there were serious errors made. Had this case been handled correctly, by a registered insolvency practitioner (IP), the company would have been voluntarily liquidated and a new company started, jobs may have been saved, and the director would not have had a personal liability.

Pressure from creditors and HMRC

The pressure from creditors awaiting payment can be relentless. In some cases, it can come out of the blue, such as when a key contract or client disappears, leaving a business unable to pay its suppliers. In other cases, directors may be struggling to pay their bills for some time, with attempts to improve the cash flow situation proving unsuccessful.

HMRC is the most common business creditor. It can be incredibly daunting to deal with an organisation that has the power to enter your premises and take possession of commercial property. Negotiating with HMRC can potentially be just as stressful, particularly if you don’t know what to expect.

In the most serious cases, HMRC can also petition to wind-up an insolvent company, issue a notice of requirement (NOR) or a personal liability notice (PLN).

A NOR is when HMRC believes that the company may be insolvent and potentially unable to pay its taxes. The requirement is usually for a recognised security bond, which must be provided within a deadline. There can also be attached a personal liability for the bond amount on a joint and several basis.

In very simple terms, the director can be made personally liable for the company VAT/PAYE debt. Bearing in mind that any breach is a criminal offence, you can see the pressure that these actions may cause.

The threat of Insolvency Service investigations

In every insolvency case, it is the IP's responsibility to review the conduct of the company directors before the insolvency took place. The IP will then prepare a report on the director’s conduct, which they’ll submit to the Insolvency Service. If there is evidence of unfit conduct in the report, it is then down to the Insolvency Service to determine the sanctions that the director should face.

The most serious offences are punishable by a ten-year prison sentence, a fine or both, but even at the lower end of the scale, the punishments can be extremely damaging. This includes director disqualifications of up to 15 years and personal liability for a proportion of the company’s debts, both of which will have serious repercussions for directors and their families.

As mentioned earlier, getting the right professional advice at the right time is critical to preventing personal damage. When is the right time? When you see the warning signs – do not try and trade on regardless.

The pressure on the family unit

The pressure on a company director’s family is one of the most difficult things to deal with. It’s impossible not to bring your work home when you’re facing creditor threats every day, and these pressures will inevitably be passed on to the director’s partner and family.

A failing business can put a considerable strain on relationships and even jeopardise a marriage. In some cases, directors might use personal funds to try and boost the business and this can put the family’s finances, and even the family home, at risk.

Watching a once successful business crumbling around you is extremely stressful. There will doubtless be sleepless nights, which not only affect a company director’s mood, but can also impact on their health.

Fortunately, you don’t have to face the pressure of running an insolvent company alone. There are professionals who can provide the expert advice you need to not only protect you and your family’s personal position, but who can also do their utmost to save your business.

Contacting a licensed IP at the first sign of insolvency will give them the best chance of saving your business. They can also help to relieve many of the pressures you’ll face at this undoubtedly stressful time.

About the author

Mike Smith is managing director of Jameson Smith & Co Turnaround Consultants,