Your Questions on Directorships- The Do’s and Don’ts.
Being a company director can offer significant financial benefits, but it also brings legal responsibilities. Each director of a limited company must ensure that the Company:
- Does not trade whilst insolvent.
- Does not prefer one creditor over another.
- Does obtain market value for any assets sold.
- Keeps proper accounting records and submits accounts & tax returns on time.
- Don’t take on further credit or issue cheques when you know there is little or no prospect of payment.
- Don’t take customer monies if your company can’t fulfil the order.
- Do pay Crown taxes on time.
- Do take early advice and our free business review.
What’s happens if you don’t do the above:
The consequences can be serious and Directors could face numerous actions against them, including wrongful or fraudulent trading, preferences and transactions at an undervalue. If the company encounters financial difficulties, then you have to act decisively, even if you are not the main director. If your limited company continues to trade after there is no reasonable prospect of avoiding insolvency, you could become personally liable for its debts. Continuing to trade is a difficult decision and you need independent advice. If you are in any doubt about your legal obligations – you need specialist advice – talk to AG Associates. You’ll find that our friendly, professional advice will be just what you need.
Actions Against Directors
Wrongful Trading
If you continue to trade when you knew or ought to have known that your company was insolvent, then if found guilty, you could be required by the courts to contribute to the assets of the company as compensation to those creditors, who have suffered. A successful prosecution may also lead to action under the Company Directors Disqualification Act 1986, seeking to prohibit you from acting as a company director for a period of between 1 and 15 years.
Call us and we assess the likelihood of the above and will explain how to limit the potential damage.
Fraudulent Trading
If you continue to trade with the intention of defrauding your creditors. If found guilty, penalties are the same as those incurred in wrongful trading. In addition, there could also be a limitless fine and / or imprisonment.
Preference Transactions
A preference transaction is any transaction entered into between a company and a third party which has the effect of placing the third party into a better position in the event of the company going into liquidation. One of the most common type of preferential transaction is where a director pays either himself or a connected party.
This transaction can be set aside, if it was entered into up to 6 months (and up to 2 years if connected) prior to the “onset of insolvency”.
Transactions at an Undervalue
If you conduct a transaction with any party in which the company receives significantly less, either in money or moneys worth than the value of that which it has released to the other party.
The relevant time period and penalties for a transaction at undervalue is the same as for a preference transaction.
Misfeasance
When a Director retains property of the company, an action for misfeasance can be brought against all the Director, who if found guilty may be required to account for the property together with interest.
Restriction on reuse of Company Names
This applies where a director or shadow director of a company that has gone into insolvent
liquidation, operates without leave of court as director or shadow director of a new company with
a similar name to that of the insolvent company, in the 5 year period following the date of
insolvency.
To be guilty of a breach, a person must have been a director or shadow director within a period of
12 months prior to the date of insolvency.
The penalties if found guilty include imprisonment, a fine or both, together with personal liability for the debts of the new company. In addition, any person who knowingly acted under instruction from the guilty party can also be made to contribute to the debts of the new company.
Company Directors Disqualification Act (CDDA) 1986
A liquidator, administrator or administrative receiver is required to investigate and report on the conduct of all persons who were directors or shadow directors of the insolvent company during the 3 years prior to the date of insolvency.
The report may include some of the areas of misconduct detailed above and the director’s remuneration, compliance with company legislation including keeping proper accounts and cooperation with the insolvency practitioner in pursuit of his duties. The report is submitted to the Department of Trade and Industry, who can pursue an action for disqualification which can result in a person being disqualified from acting as a company director for up to 15 years.
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