HMRC winding up petition: directors' key concerns

What are the immediate concerns of a company director whose business is being wound up?

If your company has been subject to a winding up petition or order, it’s very likely that you’re concerned about what the future may bring. Though incorporation offers a range of protection for company directors, there are instances where the collapse of a limited company can impact on the director personally.

Winding up can be even more stressful if HMRC is the petitioning creditor. The good news is that issuing a winding up petition is seen as a last resort by HMRC, which would prefer to give directors who are making every effort to pay their tax liability Time To Pay (TTP). If a TTP arrangement can’t be reached, HMRC would then seek to use its powers of distraint to take control of goods. In most cases, only if these attempts are unsuccessful will HMRC seek to close a company down.

What is a personal liability notice, and how may it affect me?

Personal liability notices (PLN) are becoming more widely used by HMRC to secure tax payment. They are often used in support of a winding up petition or order.

A PLN can breach the corporate protection of a limited company and make an individual liable for company tax debts. Interestingly, the individual concerned need not be a director, as is commonly thought, but can be an employee in a position of control over the relevant tax.

So, a senior administrator or company secretary may be made personally liable for PAYE or NIC, for example. The Social Security Act allows a PLN where there has been an obvious abuse of the system.

However, in recent years, there has a wider use of PLNs for VAT, or a combination of VAT and PAYE.

This kind of PLN is usually used to support a notice of requirement for a security bond, where HMRC suspects the company in question is insolvent, or is about to become insolvent (so will not/cannot pay). In these circumstances, HMRC will demand a bond is secured for the amount of tax that may be owed, or a demand for tax that is owed. Either way, the PLN can be made on a joint and several basis, making multiple individuals personally liable.   

What happens when a winding up order is made?

Once the winding up order has been made by the court, the  Official Receiver will be appointed to liquidate the company’s assets to repay HMRC and any other creditors. It is also the Official Receiver’s task to investigate all actions taken by the directors during the time leading up the liquidation. They will also complete a detailed investigation of the director’s conduct up to three years before the liquidation. The bank account will certainly be checked for any unusual transactions within the last six months.

If evidence of misconduct is found during the investigation, the director could face claims from the Official Receiver. They could also be banned from acting as a company director for a period of two to 15 years.

Key issues for company directors during insolvency

  • Preferential payments

A preference payment occurs when a company pays a specific creditor with the intention of making that one creditor better off than the company’s other creditors. If a payment of this kind occurs before a company enters a formal insolvency procedure, there could be real trouble for the company’s directors.

A common mistake is directors repaying themselves or family members for loans made to the company before HMRC or other creditors are paid. If the preference is proven, it can lead to action against the company directors and the beneficiary of the payment. Typically, dependent on the circumstances, the liquidator may simply ask for the money to be returned. If the money is not returned when requested, more serious sanctions can be made. Where these monies may be substantial, this could result in disqualification, or even a compensation order being made against the director.

  • Personal guarantees

As a director of a limited company, there are likely to be times when you are asked to sign a personal guarantee by a lender or a supplier to act as security for company borrowing. Once the guarantee is signed, the creditor will have recourse against you personally if the debt is not paid.

If your company becomes insolvent and is subsequently liquidated, and you have a personal guarantee in place, this is understandably a cause for concern. Unfortunately, I deal with a lot of cases in which the directors, particularly in construction, are not aware of the guarantees. They are typically hidden away in the terms and conditions.

To make matters worse, often the creditor with the personal guarantee has the right to call in money owed with immediate effect. This will still be the case even if there are assets and a dividend may be paid in the future to the same creditor.

My tip is not to panic and to seek professional help immediately. If a personal guarantee is called on, you should seek appropriate commercial, legal advice to make sure that the personal guarantee is valid, as they can sometimes be drawn up or executed incorrectly. If the personal guarantee is valid, you should call the creditor. Legal action is expensive and takes time, so most creditors would be open to a negotiated settlement instead, usually on a capital only basis.

  • Overdrawn directors’ loan accounts

Overdrawn directors’ loan accounts can be a real cause for concern in liquidation. Where HMRC is involved, they may object to a company voluntary arrangement, unless the amount owed by the director is repaid.

A director can find themselves owing the company money very easily. The most common mistake is to continue taking dividends when the company hasn't made enough profit and taxes go unpaid.

In an insolvency situation, a liquidator or official receiver will see an overdrawn loan account as a company asset that they will almost certainly pursue for the benefit of the company’s creditors. Around 75 to 80 per cent of insolvency cases involve overdrawn directors’ loan accounts, so this is a very common problem.      

Even if the company has written off the loan, most liquidators or official receivers would look to reverse this and ask the director to repay the loan to satisfy their creditors. This is certainly not something that can be swept under the carpet prior to liquidation, as historic accounts will be investigated.

The director will be expected to repay the loan account out of their own pocket. If they are unable to do so, they may have to enter a personal insolvency procedure, such as bankruptcy. In some cases, the overdrawn loan account will be written off if it is deemed to be insignificant.

You should seek professional insolvency advice before your company enters liquidation or a winding up process.

  • Impact on the family

The potential impact on a director’s family is often the chief concern; the negative stress of being involved in the loss of what feels like ‘your baby’ can be traumatic.

We estimate that about 30 percent of the cases that involve insolvent company closure end in separation or divorce simply due to the stress of the situation. The loss of the family home is also a huge concern that undoubtedly keeps many directors, spouses and partners up at night. The compounded insolvency stress over a lengthy period will almost certainly take its toll and may wear the director and relationship down. Suffice it to say, the family unit is very often the first casualty.

Professional help can do little for personal issues, but it can alleviate the insolvency stress very quickly; the sooner this is recognised, the better for all concerned.

Find out more: What is a winding up petition, or winding up order?

About the author

Mike Smith is managing director of Jameson Smith & Co.