6 Common Misconceptions About Insolvency

Top 6 Common Misconceptions About Insolvency

The following is my quick fire summary of the six most common mistaken beliefs of clients (and their advisers) in relation to an insolvency of a limited company.
 

1. An insolvency of a Company will affect the personal credit rating of the owners/directors.

The personal credit rating of directors and owners of insolvent companies are not affected by the insolvency of the Company unless they have signed personal guarantees (committing to repay the company’s debts personally if the company is unable to pay them).

Directors or owners may be asked if they have had a company which has been placed into an insolvency process, when they attempt to open a business bank account however no applications for personal credit can ask for insolvency history of companies in which they have ran previously.
 

2. Directors are no longer able to be directors of limited companies.

There is no automatic disqualification of directors which forbids them from becoming or continuing as directors of other limited companies. There are only disqualifications of directors if there has been fraudulent or wrongful behaviour by them whilst managing a company which was placed into an insolvency process.

The Insolvency Practitioner appointed to deal with the insolvency case is required to submit a report on the conduct to the Insolvency Service on all directors of the insolvent company within the last 3 years of trading. The Insolvency Service then review this report, consider the conduct of the directors and take disqualification action if their conduct has been unfit.

From my experience, due to the limited resources of the Insolvency Service, only the most serious cases are taken forward and therefore providing the director has not had multiple insolvencies and the records demonstrate that all that could be done to turnaround the business and pay the creditors in the ordinary course of business was done then director will not be disqualified.
 

3. Directors become personally liable for the Company’s debts to ensure that 100% of the debtors are repaid.

When a Company has been incorporated as a Limited company, the shareholders of that Company have what is called “limited liability status”. This means that the limited of their liability is to the amount of their shareholding and therefore they do not become personally liable for the Company’s debts.

The director or shareholder will only become personally liable for debts if they have signed a personal guarantee agreeing to repay them personally if the Company cannot pay (most typically with banks, factors and trade accounts).

100% of the debts is very rarely paid, as insolvency laws allow for creditors simply get paid as much as possible from what the company can afford to repay from its assets.
 

4. Directors are not able to set up again using the same name.

There are restrictions on the re-use of a same or similar name to that of the insolvent company’s (this includes trading names too), however if the new company with the same or similar name has traded for over 12 months already then this can continue as normal, under the control of the same director. The director can also choose to purchase the name from the company in Liquidation and then give notice that it has been purchased and that they intend to trade with the name, at which point the director can trade again with this name.

The key here is that the Director cannot benefit from the re-use of the name without compensating the insolvent estate and making it clear to creditors that the two companies are separate legal entities (and therefore not liable for the debtors of the other).
 

5. The Company’s owners/directors have to pay the Insolvency Practitioner’s fees personally.

This would be the case if the company had no assets or debtors, however if there are assets or debtors then these would need to be sold and/or collected in, at which point these realisations can be used to settle the fees of the insolvency practitioner then the balance can be used to pay distributions to creditors in the order prescribed by insolvency law.
 

6. Employees Loose out.

Despite common belief that employees do not get paid any outstanding entitlements if their employer goes into an insolvency process, employees can actually get paid their entitlements from a government fund set up to compensate employees when their employers cannot. This fund is called the Redundancy Payments Service and it allows for employees to claim for wages, pay in lieu of notice, redundancy pay and holiday pay (up to statutory limits). This can only be done once the Company is in its insolvency process, and it can take up to 6 weeks to receive payments therefore getting these done at the outset of the insolvency case is essential.

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