There have been a number of press reports regarding the significant increase in director disqualifications in the first three months of 2016. In addition, these appear to be higher than at any time in the past six years. The Insolvency Service is keen to promote that they are successfully tackling what they see as “dodgy directors”.
However, many solicitors only partly agree with this conclusion. In their defence, they cite the effect of the director disqualification undertakings which allows a director to disqualify himself or herself, thus ending the court action. Up until April 2001 when this legislation was introduced, each director disqualification process was overseen by the Court.
The main reason for commencing action in the first place appears to be Crown debt (for one or more of VAT, PAYE, NIC or Corporation Tax). Anecdotal evidence suggests that insolvency practitioners often see other trade creditors being paid before HMRC. However, it will be interesting to see how much of an impact, if any, RTI has in this regard.
In keeping with previous blogs, supporting documentation for decisions taken by directors is vitally important. It is essential that decisions are based on accurate and timely management information, including (but not exclusively) management accounts and realistic cash flow budgets / forecasts. Directors must understand the reasons for key negative variances and take corrective action (where possible). A short-term cash flow will identify the timing of future liquidity issues.
If your company is facing financial difficulty, signed minutes of Board Meetings (preferably with all directors present) should clearly document discussions surrounding the decision to continue trading. This decision must be based on a realistic expectation that the business’ fortunes can be turned around within the required timeframe and that any cash flow difficulties can be overcome. Furthermore, directors must be confident (and be able to demonstrate) that there is a commercially viable business going forward.
In this period, directors must ensure that the assets of the company are protected and that their value is preserved. For example, insurance policies must not be allowed to lapse or be void (for whatever reason). In addition, directors must not worsen the position of creditors as a result of the company continuing to trade.
The earlier advice is taken, the more likely that a greater number of palatable options are available. Unfortunately, if directors cannot clearly justify their decision to continue trading, they leave themselves open to potential misfeasance actions by the appointed liquidator and/or an action by the Insolvency Service regarding their conduct in period leading up to insolvency.
If you would like further information or to discuss these issues in more detail please contact Alastair Fish on firstname.lastname@example.org