After a company is liquidated either through a Creditors Voluntary Liquidation (CVL) or compulsorily winding up by the court, the actions of the directors during the previous 12 months usually come under careful scrutiny.
If the liquidator (or official receiver) believes the director(s) in question did not act in accordance with their duties, they can be made liable for wrongful trading. This could lead to the director(s) being made personally liable for the company’s debts, or even being banned from being a director for a period 2 – 15 years.
Even if directors do get away with inappropriate conduct, they shouldn’t take comfort in their apparent luck. These things do get archived and can be reviewed at a later date, up to 6 years – and may still be held against you.
So how do you minimize this risk?
One common example is the handling of director’s loan accounts. When directors lend money to their company to use as working capital, a loan account is established (similar to a bank account).
But here’s the catch. If insolvency is on the cards, and the company pays the director back up to 12 month before the company is liquidated, it could be argued that the director’s repayment caused the company’s insolvency.
Or, if the company was already trading while insolvent and the director repaid themselves, the liquidator’s report could conclude that the director gave themselves unfair preference and consequently demand the director repay such monies.
If a director borrows money from their company they become a debtor of the company. The director is supposed to pay back the loan within the financial year; otherwise the loan will be treated as income and taxed by HMRC.
Directors – particularly those of private limited companies – tend to treat the company’s funds as if it is their own, and this is a big mistake. To avoid such issues, contact Insolvency and Law on 020 7504 1300 for free and confidential advice and to find out how we can help.