Whilst it may feel as if the world is returning to a new kind of “normal”, the effects of the pandemic will continue to be felt by the economy for a long time to come.
Small and medium sized businesses were among those most effected and, as such, a seeming saving grace was offered by the UK Government in the form of the Bounce Back Loan Scheme. The scheme allowed struggling companies in the midst of nationwide lockdowns to access emergency financing to allow them to “trade through”. The scheme required no means test, nor any assessment of financial stability, to consider the ability of those businesses to pay those sums back.
At the time, the limited criteria seemed positive to business owners, however, in the recovering climate, many of those “rescued” businesses have predictably faced difficulties in then making the repayments, resulting in many company directors having to make the difficult decision to enter insolvency processes.
When a company becomes financially distressed and/or anticipates insolvency, there is a shift in the duties of the directors from the company’s shareholders to the creditors. With limited knowledge, directors can often fall into some common pitfalls, rendering themselves at risk of being held liable for the debts of the company that remain outstanding. Common examples include:
Preferences
Preferring one creditor over another, where they ought to be considered equally. This can often take place where loans or debts are secured with directors’ personal guarantees. Unfortunately, these cannot take preference.
Wrongful Trading
Where, at some time before the insolvency process commences, a director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvency, and thereafter failed to take every step with a view to minimising further loss to the company and its creditors. For example, continuing to trade at a loss.
Transactions at an undervalue
Selling or gifting company assets where money may be made from the same to pay creditors. This can occur where a company, in the hope to recoup some loss, sells assets at a significantly lower price than their value.
Phoenix companies
The term “phoenixing” refers to the process by which a company is wound up (the assets of the insolvent company may be purchased by the directors at this time), and the directors set up a new company with a similar name operating in the same way. This essentially sets out to defraud creditors, whilst confusing consumers who assume that the company has remained trading.
The above may result in significant claims against the individuals (both criminal and civil) and may result in the disqualification of the director entirely.
Ellie Clements, Solicitor, Dispute Resolution
Please contact me if you would like to speak about the above, eclements@jacksons-law.com or call 01642 356500.
