What is the role of a company director?

A limited company is made up of shareholders (members) and one or more directors:

• The shareholders are the owners of the company. Typically, they will have invested money into the company in exchange for shares.
• The company directors are responsible for the running of the company on a day to day basis. It is the directors’ responsibility to ensure that the business of the company is conducted in accordance with its own Articles of Association and the provisions of the Companies Act 2006, and that any profits the company makes are returned to the shareholders by way of dividends. Directors have a fiduciary duty to act in good faith and in the best interests of the company.

In small or family run companies it is often the case that the directors and the shareholders are the same people, metaphorically wearing different hats.

What are the statutory duties of a director under the Companies Act 2006?

A director’s statutory duties are set out in sections 170 to 181 of the Companies Act 2006. In broad terms they set out the ways a director owes a duty to the company. They can be summarised as follows:

1. To act within powers. The powers of a director are set out in the company’s constitution (broadly speaking its Articles of Association).

2. To promote the success of the company for the benefit of its members (shareholders) as a whole. In promoting the success of the company, a director must have specific regard to the following provisions:

• the likely consequences of any decisions in the long run
• the interests of the employees of the company
• the need to foster the company’s business relationships with its stakeholders, such as customers and suppliers
• the impact of the company’s business on the community and the environment
• the desirability of the company maintaining a reputation for a high standard of business conduct
• the need to act fairly between members of the company

3. To exercise independent judgement.

4. To exercise reasonable care, skill and diligence.

5. To avoid conflicts of interest.

6. Not to accept benefits from third parties.

7. To declare interests in transactions or arrangements with the company.

When is a company director personally liable?

Generally, a director may be personally liable when he or she:

1. fails to meet his or her responsibilities under the Companies Act 2006
2. falls foul of one or more of the provisions of the Insolvency Act 1986
3. is found guilty of an offence under the Company Directors Disqualification Act 1986 and as a result is fined or has a compensation order awarded against him/her

Companies Act 2006

Liabilities under the Companies Act 2006 can arise mainly as a result of a breach of the statutory duties as set out in sections 170 to 181 of this Act.

Insolvency Act 1986

Liabilities arising under the Insolvency Act 1986 can derive from the following:

• wrongful trading (section 214) – This arises when a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration at some point before the start of the winding up of a company. The director may be liable to contribute to the company’s assets.
• fraudulent trading (section 213) – This arises in the course of a winding up when it appears that any business of the company has been carried out with the intention of defrauding creditors. The court may direct that the director contributes to the company’s assets.
• misfeasance (section 212) – This is something of a ‘catch all’ section which applies if, in the course of a winding up, a director has misapplied or retained property of the company or is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. In this case, the court may require the director to restore or account for any property or to contribute to the company’s assets.

It is worth noting that with the advent of the Corporate Governance and Insolvency Act 2020 (CIGA) the provisions relating to wrongful trading have been relaxed until 30 September 2020 due to the circumstances companies and their directors find themselves in as a result of the coronavirus (COVID-19) pandemic. However, the other provisions under the Insolvency Act remain, as do those under the Companies Act.

Company Directors Disqualification Act 1986

Liabilities under the Company Directors Disqualification Act 1986 arise as a result of investigations into a director’s conduct following a liquidation or administration. A director can be fined and/or disqualified as a result of breaches of the Companies Act and/or offences under the Insolvency Act.

In addition, further to the introduction of the Small Business, Enterprise and Employment Act 2015, a director may have a compensation order awarded against him or her. This is relatively new legislation and only one compensation order has been awarded against a disqualified director.

What are a company director’s responsibilities during insolvency?

While a director has a duty to the company, in times of financial distress, such as when a director knows or suspects the company to be insolvent, his or her duty is no longer to the company but to the creditors of the company, as it is potentially their interests which may be prejudiced as a result of any action or inaction on the part of a director.

When a company enters into formal insolvency proceeding such as liquidation or administration, a director will remain a director for statutory purposes, however his or her executive powers will end and he or she will have a responsibility to cooperate with the administrator or liquidator.

In summary, whilst a company continues to trade in the normal way, a director has a duty and responsibilities to ensure that it is run properly in accordance with its Articles and with the relevant legislation, with a view to maximising the return to the members. However, if a company is struggling financially and potentially insolvent a director’s duties turn to minimising the risk and exposure of the company’s creditors, and if he or she fails to do this, the consequence could be personal liability.

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.

See also

What you need to know about Corporate Insolvency and Governance Bill

What to do if you receive a winding up petition from HMRC

Insolvency notices

Find out more

Companies Act 2006 (Legislation)

Company Directors Disqualification act 1986 (Legislation)

Insolvency Act 1986 (Legislation)

Corporate Governance and Insolvency Act 2020 (Legislation)

Small Business, Enterprise and Employment Act 2015 (Legislation)

Publication date: 5 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.

Are phoenix companies legal? And what is the law regarding a business formed with assets of an insolvent company? Neil Dingley of Moore investigates. 

What is a phoenix company?

A phoenix company describes a business that is formed when the assets of an insolvent company are purchased out of a formal insolvency process, often by the existing company directors. After the insolvent company is closed, a new business begins to operate in the same way as before using the purchased assets.

The word ‘phoenix’ is given to these companies as in Greek mythology a phoenix bird cyclically regenerates and obtains new life by rising from the ashes of its predecessor.

When such a scenario occurs, creditors and observers frequently ask if this practice is legal, and it’s easy to see why. Often creditors, such as local authorities and water authorities, are obliged to accept such business rates customers without sanction and without question.

Is a phoenix company legal?

The truth is most companies don’t fail because of director misconduct. Therefore, from a strictly legal standpoint, there is nothing in UK law preventing owners, directors and employees of an insolvent company working for a phoenix ‘successor’, as long as the individuals involved aren’t personally bankrupt or disqualified from being a director of a limited company.

However, it should be said that if a sale takes place before the insolvency procedure, it would be investigated by a subsequently appointed insolvency practitioner.

There are also some restrictions on phoenix companies in general. For example, a phoenix company cannot have the same name or similar name to its predecessor without sanction of the court. Failure to comply will place directors in a position where they will face personal liability for company debts.

Why are phoenix companies legal?

Phoenix companies often sit badly when tried in the ‘court of public opinion’. But what observers and creditors may not be aware of are the circumstances pertinent to a phoenix company. For example:

• The directors of a phoenix company may have given personal guarantees to the predecessor company and may face personal financial pressure – similar to creditors.
• The new company may have had to provide a deposit or bond to HMRC if it required VAT registration.
• If creditors wish to deal with the phoenix, it is customary if not accepted practice to increase prices to recoup losses from the first time around.
• In order to be allowed to continue to hold office, the directors may have had to pay fines and/or provide undertakings to the Secretary of State for the Department of Business Energy & Industrial Strategy.

To summarise: provided they remain within the parameters of the law, phoenix companies are legal. However, the success of a phoenix company will depend on the market place and on the customers and suppliers with whom it trades.

About the author

Neil Dingley is restructuring and insolvency partner at Moore – Stoke on Trent and has a background in information technology and accountancy

In the 2018 Budget, then chancellor Philip Hammond announced that HMRC’s preferential creditor status in insolvencies will be restored next year. Neil Dingley of Moore Stephens explains how this will affect insolvency processes from 6 April 2020.

What was Schedule 6 to the Insolvency Act 1986?

The Insolvency Act 1986 gained Royal Assent on 25 July 1986. Schedule 6 to this Act set out the different types of debt which were to be classed as ‘preferential’, ie those which were to be paid ahead of ordinary unsecured creditors. Under Schedule 6, the Inland Revenue (as was) could claim preferentially for 12 months outstanding PAYE and NIC, and HM Customs & Excise could claim preferentially for 6 months outstanding VAT.

What is the Enterprise Act 2002?

This remained good law until the enactment of the Enterprise Act 2002, at which point the Inland Revenue and HM Customs & Excise lost their preferential status.

In 2005, the Inland Revenue and HM Customs & Excise were combined into a single department, HM Revenue & Customs (HMRC), and in October 2018 it was announced that HMRC’s preferential status will not only be restored but extended to encompass any and all outstanding PAYE NIC and VAT at the date of insolvency.

HMRC’s preferential status will take effect from 6 April 2020 and more or less returns the insolvency creditor process to the pre-Enterprise Act 2002 era.

Why are HMRC receiving preferential creditor status in 2020?

These changes are being made principally to enable HMRC to collect more tax from insolvent companies and individuals. Some estimates say the move could raise around £195 million annually.

This will naturally benefit HMRC but is potentially detrimental to ordinary unsecured creditors and holders of floating charges, who will only be entitled to be paid after HMRC’s PAYE NIC and VAT liabilities have been paid in full.

From April 2020, insolvency practitioners and solicitors, especially those who issue winding up and bankruptcy petitions, will have to educate and manage the expectations of those clients on whose behalf petitions are issued.

It’s important to remember that not all debts owed to HMRC will have preferential status after 2020. However, those debts that are preferential, unlike pre-Enterprise Act 2002, will not be time barred. This will result in further reduced funds being available to pay dividends to unsecured creditors. Not only that, when preferential debts are increased, this will also inevitably result in a reduced prescribed part (S176A Insolvency Act 1986) in those cases where this applies.

Whilst issuing petitions was never a guarantee of clients getting their money back, under the new regime there is every likelihood of the dividend prospects to floating charge and unsecured creditors being diluted because of the increased reach of HMRC’s preferential status.

About the author

Neil Dingley is Restructuring and Insolvency Partner at Moore Stephens – Stoke on Trent and has a background in information technology and accountancy.

Here are a few steps to take to protect yourself as a customer, by Moore Stephens.

If the forecasts are to be believed, UK businesses face challenging times in 2018. Among the casualties of 2017 were such household names as Monarch Airlines, Greenwoods and Jaegar.

And with ever-increasing pressure on household budgets, it’s essential that customers take whatever steps they can to ensure that they don’t get caught in the aftermath of a company administration or liquidation.

There are several ways that customers can protect themselves when making a significant purchase:

• Make payment by credit card (remembering to pay in full when the statement is received to avoid incurring interest charges) – under the terms of the Consumer Credit Act, credit cards must provide protection for purchases above £100 and below £30,000.
• Specific insurance is available for significant purchases, such as those associated with weddings.
• Be wary if payment requests are for cash – this may be an indication that the shop or merchant is having cash flow difficulties.
• If payment is made by cash, ensure that you are given a receipt or proof of purchase.
• If you are unfortunate enough to become a creditor in a bankruptcy or liquidation, retain all purchase documentation until the case is closed – you may be asked to prove your claim if a dividend is declared, and your claim may be rejected if you can’t prove that you have paid.

About the author

Neil Dingley is restructuring and insolvency partner at Moore Stephens.