Are You Aware of the Changes to Administrator and Liquidator Powers?

The Small Business, Enterprise and Employment Act 2015 made several changes to insolvency laws that company directors should be aware of.

The act introduced an increase in administrator and liquidator powers, making directors’ risk of personal liability and litigation by creditors greater than before.

This is because the amendments were brought about to protect creditors in cases where director conduct is questionable.

The new law effectively makes it easier for a claim to be made against a delinquent director or directors.

Before we continue, an important distinction should be made:

Fraudulent trading ;

A director consciously made the decision to continue trading even faced with the knowledge that their members of staff or creditors would not be paid.

Wrongful trading or misfeasance;

This could include failing to pay company tax liabilities and statutory returns. It suggests mismanagement and a lack of care for their creditors rather than a deliberate attempt to defraud.

Remember – showing preference to a particular creditor, or selling assets below their market value, are also both likely to be investigated if the company becomes insolvent.

Accusations:

Administrators are now able to begin proceedings against company directors if they suspect unfit conduct has taken place (before the new legislation was passed, only liquidators had the power to proceed in accusing directors of fraudulent or wrongful trading).

Another part of the novel legislation rules that cases for fraudulent or wrongful trading can now be assigned to third parties – unsecured creditors are able to make claims against directors without doing it in their own name.

The problem that may arise from the new law is that their creditors’ mentality may change – as it is now easier for them to gain compensation, they may be tempted to try to make a profit solely through claims.

Though these claims are unlikely to be straightforward, motivation to seek amends from the company they blame for financial loss will inevitably be sparked.

In comparison to claims from unsecured creditors under previous legislation, they are now further up in the hierarchy.

Also, the cost of bringing the case to the courts will be more manageable if spread between a group of creditors who work together to take action.

Be aware that being found guilty of fraudulent or wrongful trading may leave directors personally liable for their business’ debts.

If you are thinking of closing your company, you need to make sure everything is done correctly by getting specialist help and advice. Just give us a call for some non-obligation advice; 01472 254914.