In terms of section 214 of the Insolvency Act 1986 a director of a company in insolvency may be ordered by a court to contribute towards any losses incurred by the company’s creditors.
The court will only make a contribution order where the director is shown to have known, or that he ought to have known that the company was insolvent and despite this continued to trade.
A company is insolvent if it is unable to pay its debts as they become due or is insolvent on a balance sheet test (liabilities exceed assets).
In assessing the level of contribution the court fix a date when the director ought to have taken steps to wind the company up. The director may be held liable for any debts incurred by the company after this date. Those debts include trade creditors, HMRC debts including unpaid PAYE, VAT and N.I from this period.
The courts are aware that companies often go through difficult trading periods and that trading through a downturn is a legitimate business practice. Thus, if a company is having difficulties in paying its debts but expects to win a large contract which will ease the situation that may constitute a defence. However it is not a defence to say you were unaware of the law or of the company’s financial difficulties. It is not a defence that you did not have, or did not prepare management accounts.
A finding of wrongful trading may also be used as evidence that a director should be disqualified from acting as a director of a company.
Section 121C of the Social Security Administration Act 1992, provides HMRC with powers to recover unpaid National Insurance Contributions, plus interest and penalties, from the directors and officers of a company. The purpose of the legislation was to tackle abuse of the National Insurance system and to act as a deterrent to future abuse. The legislation applies to National Insurance contributions that a body corporate ought to have paid but failed to pay and where that failure is attributable to fraud or neglect on the part of one or more individuals who were officers or directors of the company.
This little known provision is separate from any provisions under the Insolvency Act. An adverse finding against a director under the Social Security Administration Act 1992 may be founded upon in a subsequent application to disqualify a person from acting as a director of a company.
For further information on directors’ duties please contact our expert business lawyers by telephone on 0141 332 0915 or by e-mail to arrange a free initial consultation.