Directors Should Be Aware Of Their Responsibilities In Insolvency

Following recent investigations by Company Investigations of the Insolvency Service, three connected companies that misled directors of insolvent companies by promising they could help them walk away from their responsibilities have been wound up by the High Court, on the grounds of public interest.

The Insolvency Service called the actions of the companies a shocking abuse of the insolvency regime, where directors were duped into thinking they could just ignore their liabilities and walk away, leaving creditors without any chance of recovering what they were owed.

The Service stressed that directors should be aware that there is no escaping their responsibilities and that they will still have to settle with their creditors in the right and proper way.

Under current insolvency law, directors are under a duty to act in the best interests of their company and its shareholders while it is still trading. However, the moment a company is deemed to become insolvent, the directors are under a legal duty to protect the interests of their creditors instead of their shareholders and to get the best return for them.

The Insolvency Act 1986 stipulates that the directors must prepare a ‘statement as to the affairs of the company’ and ‘cause that statement to be laid before the creditors’ meeting under Section 98’. In addition, one of the directors is to ‘preside’ at that meeting.

Once a liquidator has been appointed, all the powers of the directors cease but section 235 of the Act places a duty on the directors to co-operate with the liquidator.

The Act says that officers, or former officers of the company must give to the liquidator ‘such information concerning the company and its promotion, management, formation, business, dealings, affairs or property as the liquidator may reasonably require’.

In addition, there is a further obligation on the directors to ‘attend on the office-holder at such time as the latter may reasonably require’.

Tim Close is an accountant specialising in business insolvency, debt recovery and business rescue.

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