How are Directors Affected During Bankruptcy or Insolvency?

Under new insolvency rules, if under restrictions from bankruptcy directors can now be disqualified from acting as a limited company director.

If trading by a limited company should prove unsuccessful, the company becomes insolvent and bankrupt meaning they are unable to repay debts.

What Is the Difference Between Bankruptcy and Insolvency?

• Insolvency is a state of economic distress – during formal insolvency proceedings a practitioner will investigate the circumstances surrounding company failure.
• Bankruptcy is a court order that decides how an insolvent debtor will deal with unpaid obligations. Often, this will involve selling assets to erase debts that cannot be paid.

When Can a Company Director Be Held Liable for Company Debts?

Company status does offer protection to a director to a certain extent, but there are some circumstances where the director can be responsible for paying company debts. Certain circumstances include:

• Overdrawn loan accounts.
• Debts accumulating due to fraudulent means e.g. taking on credit you are unable to repay.
• Continuing to pay shareholders dividends whilst the company is insolvent.
• Using company money/assets for personal use (misfeasance).
• Disposing company assets as undervalue/no value.

What Else Can Cause Disqualification?

As a director of a limited company, there is a duty to do the best for the success of the company. A director can be disqualified for several reasons, including wrongful or fraudulent trading and 'unfit' conduct. Anyone can report a company director’s conduct as being unfit. In turn, you can be investigated and banned from being a company director if you do not meet your legal responsibilities in accordance with the Companies Act 2006. These include:

• Allowing your limited company to continuing to trade when directors knew that there was no prospect of avoiding liquidation.
• Not keeping company accounting records.
• Failing to send accounts/returns to Companies House.
• Not paying tax.
• Using company money/assets for personal use (misfeasance).
• Failing to assist the insolvency practitioner.

Sole Trader vs Limited Company: Directors’ Choices in Financial Difficulty

When forming a company, the two main ways you can choose to operate: take on work as a sole trader or incorporate as a private limited company. A significant benefit of operating as a limited company is that your business will be its own separate legal entity, which can be helpful if the company runs into financial troubles.

If a director is disqualified:

• They are not banned from working as an employee for the same company or from holding shares in a private limited company.
• They can also work as a sole trader or within a joint partnership but not as a limited liability partnership.

If you would like any advice on company formations, call 0800 0198 698 or contact us online to find out how we can help you, or browse the products on our website.