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.
In late March 2020 the UK government announced that these provisions were to be reviewed in light off the Covid-19 crisis to encourage company’s to continue to trade. The details of the changes are as yet 930 March 2020) unknown. Any changes to the legislation are to be backdated to 1 March 2020 according to a government press release.
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 404 1091.
Section 213(1) of the Insolvency Act 1986 provides that,
“If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.”
A fraud in the context of the Insolvency Act can be defined as any act conceived and carried out by a director for the purpose of deceiving the company’s creditors or depriving them of their rights.
A finding of fraudulent trading can have significant adverse consequences for a director. The court can order the director to make good all or a large part of the company’s debt. This includes trade debtors, debts owed to HMRC, loans and other unpaid obligations incurred by the insolvent company.
Fraudulent trading is much harder to prove but a finding of fraudulent trading exposes a director to potentially repay all the insolvent company’s debts. Plainly, if the director is unable satisfy the order the director runs the risk of being made bankrupt.
Under section 993 of the Companies Act 2006 fraudulent trading is a criminal offence with a maximum sentence of ten years for each offence. A conviction under section 993 could also lead to a confiscation order being made under the money laundering provisions.
For further information on directors’ duties please contact our expert business lawyers by telephone on 0141 404 1091 or by e-mail to arrange a free initial consultation.