The UK government’s latest official monthly insolvency statistics for England and Wales show total company insolvencies on the increase again and industry experts predict that worse is to come.
The number of registered company insolvencies in July 2022 was 1,827, a 67% increase from the same month in the previous year (1,096 in July 2021), and 27% higher than the number registered three years previously (pre-pandemic; 1,440 in July 2019).
Why are company insolvencies increasing?
According to Allianz Trade, corporate insolvencies will grow by 37% this year, with the UK on track to become the first major European economy to exceed pre-pandemic levels.
The analysis suggests that the removal of Covid support, rising commodity prices, supply chain disruption, Russia's invasion of Ukraine, and the "lagging consequences" of Brexit will all contribute to an increase in insolvencies.
With more companies facing the threat of insolvency, Directors should be mindful of their responsibilities during these difficult times.
What is insolvency?
In simple terms, a company is insolvent when it can’t pay its debts. This could mean either:
- it can’t pay bills when they become due
- it has more liabilities than assets on its balance sheet
An insolvent company is in danger of being closed down. However, company directors may be able to take action that allows the company to continue trading.
‘Insolvency’ describes both the situation an insolvent company is in and also the various legal procedures for dealing with this situation under the Insolvency Act 1986.
How can an insolvent company continue trading?
There are 3 options that allow an insolvent company to continue trading. Directors can:
- contact all creditors to see if the company can reach an informal agreement
- enter into a company voluntary arrangement
- put the company into administration, offering some respite from creditor action and enabling:
- the company to continue
- property to be sold
Directors also have the option of liquidating (‘winding up’) the company. This means the company is closed down and its assets are sold and distributed to its creditors.
What are the Directors’ duties in insolvency?
The key legislation regarding directorial conduct in insolvent situations is the Insolvency Act 1986. The directors of a corporation have a responsibility to safeguard the interests of the firm's creditors when it becomes bankrupt. Therefore, directors may be held accountable for their decisions both before and after a company ceases operations. The primary duties can be summarised as follows:
Misfeasance is misusing or holding onto corporate property or failing in your executive duty when handling money. Both present and former officers of the company are subject to it.
(b) Personal accountability
This makes officers personally accountable for the extent of the loss caused by their actions. It is also taken into consideration by the relevant insolvency authorities.
(c) Wrongful trading
Directors may be held accountable for wrongful trading if they carry on with a business and accrue more debts and despite knowing there was no way to keep it from going bankrupt.
(d) Fraudulent trading
Directors may be held accountable for fraudulent trade if they continue to operate a firm and accrue additional debts while knowing there was no possibility the company could escape insolvency and with the intention to defraud creditors.
(e) Personal guarantees
Any directors' personal guarantees for the company's obligations will probably be enforced as a result of insolvency procedures.
(f) Preference payments
If insolvency is anticipated, a business should treat each creditor fairly. Directors may be held personally accountable for the payments made to the favoured creditor if one creditor is given preferential treatment over others so that they are in a better position.
(g) Transactions at undervalue
The directors may be personally liable to contribute to the difference in value if assets are transferred for less than their market worth in the two years prior to insolvency.
How 3CS can help
3CS can offer help and advice on the legal aspects of corporate insolvency, including directors’ duties, obligations, and risks. If you require advice on corporate insolvency, or any corporate legal matter, please get in touch.