Category: Resources

What are the responsibilities and duties of a company director?

When is a company director personally liable and what are a company director’s responsibilities during insolvency? Neil Dingley of Moore Recovery in Stoke on Trent explains the duties of a company director.

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.

Moore Response to Coronavirus disease (COVID-19)

Dear All,

The content and tenor of the Prime Minister’s daily press briefings leave us in no doubt that the UK and indeed the whole of Europe is on a war footing. Against a threat which comes not from the skies or from the seas but from an unseen enemy whose very presence is having a profound impact on our daily lives, in our homes and in our places of work.

The spread of Coronavirus and the precautionary measures put in place to contain it have already had a dramatic impact on the UK economy, as is evidenced by the increasing number of businesses forced into reducing their workforces or their opening hours, especially in the leisure and hospitality sectors.

In recognition of the level of disruption predicted to be experienced by UK businesses the Government has announced unprecedented levels of support for the UK economy in the sum of £330bn.

Much of the substance of the support measures remains to be expanded upon. At present, the major areas of assistance are:

Support for businesses paying sick pay

Support for businesses paying business rates

Support for businesses paying taxes, including VAT

Provision of the Coronavirus Business Interruption Loan Scheme

There can be little doubt that challenging and uncertain times lie ahead for the UK economy and in particular the owner managed businesses which are at its heart.

We cannot predict how long this period of uncertainty and disruption will last. But in the meantime we would wish to assure you and your clients that if you require any advice or assistance or even just someone at the end of a phone to act as a sounding board then we will be here for you.

We are observing the social distancing guidelines in the office for ourselves and for clients. We may not necessarily be able to meet face to face but with video and teleconferencing as normal a service as possible will be maintained.

Indeed, like many of you we have already put measures in place to ensure that the business of Moore Recovery in Stoke on Trent will continue uninterrupted.

In order to be responsible to ourselves, our family, friends, clients and the public at large, we are keeping up to date with all the guidelines recommended by the Government and WHO and making sure we follow the recommended regulations.

Please do not hesitate to contact us on any of the usual numbers or by email. In the meantime we send our best wishes to you and your circle of colleagues, friends and family.

Mr N J Dingley & Mr M H Abdulali

Partners

What is an IVA and is it right for you?

 What is an IVA?

An individual voluntary arrangement (IVA) is a legally binding contract between an individual (the debtor) and his or her unsecured creditors, under which the debts owed by the debtor to his or her creditors will be compromised by time and or amount, depending on the debtor’s financial circumstances.

Typically, an IVA will enable the debtor to repay a proportion of his or her debts over a period of time; usually no longer than five years. The proportion to be repaid (the ‘pence in the pound’) will be determined by what the debtor can afford and what the creditors are prepared to accept.

In any event an IVA should offer a better outcome for unsecured creditors than if the debtor were to be declared bankrupt.

What is the role of an Insolvency Practitioner during an IVA?

The IVA proposal is prepared by the debtor with the assistance of an Insolvency Practitioner (IP). Provided the IP is satisfied that the proposal is, amongst other things, fit, fair and feasible, he or she will agree to act as ‘Nominee’ and place the proposal in front of all the creditors.

An IVA must be approved by 75 per cent by value of a debtor’s unsecured creditors. If the proposal is accepted, the Nominee becomes the Supervisor of the IVA and it will be his or her responsibility to ensure that the terms of the IVA are adhered to.

When an IP is first approached by a debtor with a view to proposing an IVA, he or she should always make the debtor aware of the alternative courses of action which are available. The IP should provide a copy of, or provide the website link to ‘Is a Voluntary Arrangement right for me?’. This is an explanatory leaflet on IVAs published by R3 – The Association of Business Recovery Professionals.

What are the benefits of an IVA?

For the debtor, the principle benefit of an IVA is that it avoids the restrictions of bankruptcy, under which a debtor cannot:

borrow more than £500 without telling the lender that he or she is bankrupt

act as a director of a limited company or be involved in the promotion or management of a limited company

  • carry on business under a different trading style
  • be a trustee of a charity
  • work as an insolvency practitioner
  • sit or vote in the House of Commons or the House of Lords
  • be a school governor
  • be a solicitor or accountant

If a bankruptcy petition has been issued, this can be superseded by an application for an Interim Order, allowing the debtor time to propose an IVA.

Whilst the fact of an IVA is a matter of public record – it is entered onto the government’s Individual Insolvency Register – the contents of the proposal remain confidential between the debtor and his or her creditors.

When might an IVA be a good option?

An IVA might be the right option if:

  • a debtor runs a good business but it is insolvent, then an IVA offers the best practical solution to save the business and repay monies to the creditors
  • by virtue of a person’s job or profession – e.g. accountant, solicitor or MP – bankruptcy would prevent them from earning a living then an IVA would be the preferred alternative
  • a third party will put in money for creditors to preserve the family home

What are the disadvantages of an IVA?

Despite its appeal, there are naturally some disadvantages to an IVA, including:

  • A ‘contributions based’ IVA can last up to five years. An income payment agreement in bankruptcy, however, typically lasts three years.
  • As every IVA is recorded on the Individual Insolvency Register, it will appear on any credit reference searches for up to six years, leading to possible difficulties in obtaining future credit.
  • The initial costs of an IVA can be significant. The Nominee’s fees may have to be paid by the debtor up front, which may be a lot to ask of a debtor already in financial straits.
  • If a debtor fails to comply with the terms of the IVA the Supervisor will be obliged to terminate the IVA, thus exposing the debtor once again to his or her unsecured creditors. The Supervisor may also be obliged upon the failure of the IVA to petition for the debtor’s bankruptcy.

What are the alternatives to an IVA?

If you have nothing to lose, for example if you live in rented property and bankruptcy wouldn’t have a detrimental impact on your ability to earn a living, then an IVA might not be right for you and bankruptcy may well be the most appropriate solution.

There are some other alternatives to an IVA, including:

  • a debt management plan (DMP) – administered by a debt management company, they will collect money from the debtor each month and share this between the creditors in proportion to their debts. Debtors should be aware that creditors may continue to charge interest on their debts or may decide not to participate in the process. Unlike an IVA, a DMP is not a legally binding agreement.
  • doing individual deals with creditors – this may be feasible if the number of creditors is relatively small and creditors are willing to cooperate.
  • a debt relief order (DRO) – this is only available if debts are less than £20,000, net assets are less than £1,000 and the debtor has disposable income of less than £50 per month.
  • do nothing – clearly this has its own inherent risks.

https://www.thegazette.co.uk/all-notices/content/103510

What restrictions are there during bankruptcy?

Upon the making of a bankruptcy order, for a period of twelve months thereafter the person declared bankrupt (the debtor) has certain obligations to his or her trustee in bankruptcy and certain restrictions placed on his or her actions and conduct.

These restrictions are summarised below. The debtor cannot:

  • borrow more than £500 without telling the lender that he or she is bankrupt
  • act as a director of a company or be involved in the formation, management or promotion of a company without the court’s permission carry on business in a name or trading style different to the one under which he or she was made bankrupt
  • be a trustee of a charity
  • work as an insolvency practitioner
  • sit or vote in the House of Commons or the House of Lords
  • be a school governor
  • be a solicitor or accountant

How long do bankruptcy restrictions last?
In short, restrictions last until an individual’s bankruptcy ends. Provided the debtor cooperates with his or her trustee in bankruptcy and has not been dishonest, the debtor will usually be free from restrictions when twelve months have elapsed. If the debtor has not cooperated, the trustee in bankruptcy may apply to the courts to have the twelve months automatic discharge suspended until the debtor cooperates.

Furthermore, if upon investigation it comes to light that the debtor is found to have committed a bankruptcy offence then the Official Receiver (OR) may impose a Bankruptcy Restriction Order (BRO) or accept a Bankruptcy Restriction Undertaking (BRU) from the debtor.

Offences giving rise to a BRO or BRU include:

  • gifting or transferring at an undervalue bankruptcy assets
  • preferring one creditor over another
  • borrowing money in the knowledge that it cannot be repaid
  • neglecting business affairs and in so doing increasing the debts of the business
  • not cooperating with the Official Receiver
  • fraudulent or dishonest behaviour, for example providing false information to obtain credit

 

If a debtor willingly accepts the OR’s findings or wishes to avoid the time and costs of attending court by reaching an agreement with the OR, he or she may provide the OR with a BRU. Typically, this will increase the bankruptcy restriction period from twelve months to three to four years.

If no BRU is provided, the OR can make an application to Court for a BRO to extend the bankruptcy restriction period to between two and fifteen years. This effectively brings the bankruptcy restrictions regime in line with company directors disqualification guidelines in that a company director found guilty of an Insolvency Act or Companies Act offence can be disqualified from being a director for two to fifteen years.
https://www.thegazette.co.uk/all-notices/content/103448

What are phoenix companies and are they legal?

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

How will the changes affect insolvency practitioners going forward?

How will HMRC’s preferential creditor status affect the insolvency process in 2020?

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.

Challenging times: protecting yourself as a customer

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.