Insolvency: Myth busting for directors

There are several myths surrounding insolvency in business, which often lead to confusion and poorly planned actions.

Insolvency practitioners are neutral and independent, their role is to ensure a fair outcome for all parties involved and they are paid from the assets of the company. Even Keel Solutions have compiled this list of the most common myths within their industry:

Myth: Once you are declared insolvent, you cannot ever be a director again.

Not completely true. The nature of your insolvency will be the deciding factor on whether you can become a director of another company. If you are guilty of misconduct, then you can receive up to a 15-year ban from the Secretary of State. In most cases, directors of insolvent businesses can go on to start another company or continue in another company they are already a director of.

Myth: I’ll lose my home and personal assets if I’m declared insolvent.

This one comes down to if you have given any personal guarantees to creditors. If you haven’t, then your personal assets won’t be affected by the process. If you have made personal guarantees against a bank loan or a premises lease for example, then it depends on the amount owed which will determine whether personal assets will need to be used.

Myth: My credit rating will be affected.

This only happens with personal insolvency.  Entering your business into insolvency will not affect your personal credit rating.

‍Myth: My relationship with the bank is over.

Each situation will be assessed individually by the bank, and factors such as the reason for liquidation and the borrower's current financial situation will be considered. Different banks have their own policies and may have different attitudes towards lending to business owners that have gone through liquidation.

Myth: Insolvency is the end of the road for a business.

Insolvency is not always the end for a business. In some cases, it may be possible to restructure the business and continue trading.  Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress. Companies can restructure, sometimes through a Phoenix situation, or by selling the business to a third party.  

Myth: Insolvency is a personal failure.

Insolvency can happen to anyone, regardless of their personal or financial situation. It can be caused by factors such as changes in the economy or unexpected events. Whilst is can be hugely emotional to have to close business, there is a way forward out of a difficult situation.

Myth: I’ll go to prison if found guilty of misconduct.

Imprisonment is generally only considered in the most severe cases of misconduct related to insolvency. Misconduct can include actions such as fraud, mismanagement, or illegal activities. In most cases, the action taken against a director found guilty of misconduct is to receive a ban from holding future roles as a director within another company. This ban can reach up to 15 years, but this is usually reserved for the most severe cases.

Myth: I can lose the debt if I put the company into Pre-pack Administration.

Pre-pack administration is a process that allows for the continuation of a company's trade during the administration process. It is not a way to avoid or eliminate the company's debts or liabilities. In a pre-pack administration, the company's assets are sold to a third party or back to the directors, or by a management buyout, usually a pre-arranged buyer, and the proceeds from the sale are used to pay off the company's creditors.

Pre-pack administration is subject to close scrutiny and must be conducted in a transparent and fair manner. An independent valuation of the company's assets must be carried out, and the price that is agreed upon must be fair and reasonable, otherwise it could be considered as an undervaluation of assets. The sale to an associated party will also be reviewed by an independent party, to ensure that the sale is in the best interests of the creditors.

Myth: I can pay off some creditors in the lead up to my company’s closure.

This is called a "preference payment" and it's illegal for a company to pay off some creditors before others to give them an unfair advantage.

For a preference to be proven against the creditor, the liquidator will need to show that the payment was made deliberately to put the creditor in a better position than other creditors. If the preference payment is to a connected party, then the "deliberate" part of the proof is assumed and so the payment can be more easily reversed.  Directors have a legal duty to ensure that all the company's creditors are treated equally and should not make any preferential payments without the approval of the liquidator or the court.

The laws and regulations regarding insolvency can change over time, and it's always best to consult with a qualified professional such as your accountant or an Insolvency Practitioner for the most accurate and up-to-date information.

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If you’re experiencing financial distress in your business and need some help, please do get in contact with us for a no-cost initial and confidential conversation. Call us on 01202 237337. We’re an experienced team with strong values. We like to understand your needs and ensure you have the best advice possible. We’re experts in all areas of insolvency; you can read more about us on our website here.

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