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Insolvency and protection from liabilities

We all hope that our businesses will be successful. Sadly, things often go wrong and if the company becomes insolvent, it can lead to personal and financial distress for the shareholders and directors.

Cashflow is the most common reason for a company failure. When the company cannot pay its debts, it is at risk of some form of insolvency including creditors compulsory liquidation or administration. In either, the company and its assets are placed in the hands of an insolvency practitioner whose aim is to realise as much of the value of the company for the benefit of the creditors.

A liquidator or administrator will also look at the conduct of the directors and can issue proceedings for, among other things, wrongful trading (continuing to incur debts at a time when liquidation or administration was or should have been seen as the inevitable outcome) and taking dividends at a time when the company did not have profits from which to pay them (which often happens because the directors take salary as dividends to save income tax).

These claims will be for damages to be paid by the directors personally to the liquidator or administrator for the benefit of the creditors as a whole.

Steps that you can take if you think that your company is in trouble are:

  1. Collect as much of the money owed to the company as possible. We can assist with debt collection through the County Court or the High Court
  2. Take advice on whether the company can safely continue to trade
  3. Take advice on voluntarily closing the company to prevent any allegations by a liquidator from arising

If a company goes into liquidation and the liquidator makes claims against the directors, they can lead to large financial orders and a lot of money for the costs of the liquidator and the directors themselves.

We recommend that if you are running a company, even if it seems to be operating successfully, you should consider obtaining insurance against directors’ liabilities.  These policies will usually cover the legal cost of taking advice and defending any claims against the directors.  They will also cover damages awards or agreed payments to the liquidator.

The policy should also provide cover for the costs of directors disqualification proceedings which can be brought by Secretary of State for Business Energy and Industrial Strategy quite independently of the liquidator or administrator.

Contact us for advice on the benefits of these policies and what to do if you think that your company is at risk of insolvency or has been served with a statutory demand (the first step by a creditor in winding the company up) or insolvency proceedings.

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