If you used to be the director of a limited company which has since collapsed into insolvency, then you may be tempted to heave a sigh of relief that you got out before things went wrong. However, depending on how recently you left, the role you played, and your knowledge of any financial difficulties, there is a chance that you may bear some responsibility for the consequent fallout.
As Michael Clinch, dispute resolution lawyer and insolvency expert with Ingram Winter Green explains:
‘There are circumstances where, despite having resigned your position before the collapse took place, you could find yourself at the centre of the insolvency process and facing the possibility of being asked to make a personal contribution towards company funds. You may also find yourself exposed to the threat of director disqualification proceedings and the possibility of criminal sanctions being imposed.’
It is vital that you take legal advice on your position as soon as possible, ideally before tendering your resignation.
To minimise the risk of your departure triggering such a chain of events, it is vital that you take legal advice on your position and ideally this should be done before tendering your resignation. If you have already resigned, you should consult our solicitors as soon as you become aware that a company where you were formerly a director has become financially distressed.
Effect of resignation
When you resign as the director of a limited company you will need to notify your fellow directors in writing of your intention to leave and also file form TM01 with Companies House. The consequence of doing this will be to conclude your legal relationship with the company from the date that your resignation takes effect. However, you will not be relieved of liability, for example, in respect of:
- any wrongdoing that occurred or which might have its origins in the period when your directorship was active;
- any personal guarantees you have given on the company’s behalf; or
- any monies owed in respect of an overdrawn director’s account.
Wrongdoing during a directorship
A director might be guilty of insolvency or company law offences which put the director at risk of investigation by the Insolvency Service. Alternatively, a liquidator might look to recover from directors or former directors if they have committed a breach of duty or failed to comply with legislation. Some examples include allegations of:
- misapplying, retaining or becoming accountable for any money or other property belonging the company (known as misfeasance);
- breaching certain fiduciary or other directorship duties;
- continuing to trade the company at a time and in circumstances where it was known, or ought to have been concluded, that there was no reasonable prospect of the company avoiding an insolvent collapse (known as wrongful trading);
- carrying on the business of the company for a fraudulent purpose or with an intention to defraud company creditors or the creditors of anyone else (known as fraudulent trading).
Other potential liabilities
You may also find yourself liable for any unpaid or underpaid PAYE or National Insurance contributions due from the time you were in office if HMRC conclude that these debts arose due to neglect or fraud on your part and if they decide to serve a personal liability notice.
Consequences
If you are found to be personally liable for any company debts, then the likelihood is that you will be actively pursued for the amount owed in order to maximise the monies available for distribution to the company’s creditors. If you do not have the means to pay, then you could be taken to court and made subject to a range of orders, including orders which could ultimately sanction the sale of your home or any other property that you own. You may also be declared bankrupt or find yourself having to enter an Individual Voluntary Arrangement with your creditors.
Where you are found to have been guilty of serious misconduct or dishonesty while in office, you may also be subject to director disqualification proceedings and criminal sanctions.
How we can help
As a firm, we are experienced in advising company directors on all aspects of their role and in particular on any concerns that may arise concerning the possibility of personal liability.
We have particular expertise in providing advice on the steps that should be taken in the run up to resignation to avoid the risk of personal liability arising, and post resignation where a company enters any form of insolvency process.
We have particular expertise in providing advice on the steps that should be taken in the run up to resignation to avoid the risk of personal liability arising.
We can help you to assess your position before your resignation takes effect and advise you on your risk exposure and any available mitigation strategies. These might include trying to negotiate your release from any personal guarantees that you have given and coming to an arrangement with HMRC which allows you to repay arrears of PAYE or NIC in instalments.
Where insolvency occurs and a liquidator, administrator, third party or anyone else indicates an intention to come after you for a personal contribution, we can advise you on:
- the likelihood of you being able to mount a compelling defence;
- the means by which it might be possible to strike an acceptable liability deal;
- how any monies found to be properly due might feasibly be repaid without your personal finances being unacceptably compromised; and
- whether you might be eligible for a redundancy payment that could be applied towards helping you settle the sums that are owed.
We can also help you to respond to director disqualification proceedings and to defend yourself against any potential criminal charges that you may face.
For further information, please contact Michael Clinch on 020 7845 or via email at michaelclinch@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.