Personal liability and disqualification as a Director of insolvent company

[Jos Jones]

I couldn’t find a relevant thread so I thought I would ask here.

I have been helping out a company externally since December and I formally joined a company in February as a Director (not a shareholder). It was experiencing cash flow issues with suppliers but had a history of extreme growth, solid profitability and had positive forecasts to trade it's way out of difficulty. Cash flow issues were caused by ramping up assets prior to me joining in anticipation of our biggest customers growth expectations.

Within two weeks of my appointment, that same customer went into administration owing a huge amount to the company (uninsured) and wiped off significant future revenues. We let our asset lenders know to get payment holidays (as the invoices were funded by our invoice finance facility) and got HMRC in to present the situation and our plans for resolution. HMRC put in a TTP. We quickly replaced the lost revenue but it wasn't as profitable. Over the last 4 months our HMRC debt has built up to roughly £900k which they kindly added into the TTP agreement. £750k in PAYE over 5 years and £150k in VAT over 2 years. I also personally loaned the company £40k to help it out with a signed agreement it would be paid back in two weeks, which the company was unable to do. We were in the process of securing a £500k long term loan from an associated company to reduce our creditors.

Up until last week (when we lost another customer and the replacement customer reduced our volumes), our forecasts have shown an ability to generate cash and pay down the liabilities. Forecasts produced on 16th June show that is no longer the case and we contacted an insolvency practitioner on the 17th. We are in the process of discussing a pre-pack administration or potential liquidation but I have some concerns for myself.

The MD has transferred me £20k back of the loan this week as I desperately needed it. It's 2 months overdue but some other suppliers and HMRC have obviously been waiting longer. We have been paying lots of suppliers since that loan. IPs have also told us to continue paying key suppliers whilst we discuss the potential of a pre-pack administration to ensure the business doesn't fail over the next few weeks. I have come to the realisation the rest of this loan is likely now lost but I'm also concerned that the £20k would be seen as preferential treatment and bring my conduct into question. I didn't do this personally, the MD processed it after I sent an email staing how far overdue it was. I raised this with the IP and they didn't seem concerned. Am I at risk here?

I'm also concerned that HMRC will disqualify me on the basis of not paying the crown. It's all currently in a TTP arrangement apart from our most recent PAYE (which fell overdue after beginning discussions with IPs) and they've given us long terms on the TTPs because we've presented our ability to resolve the matter but I'm not sure it protects me now that circumstances have changed. Will they likely disqualify me as the majority of that debt is in relation to the time I have been a Director? We haven't buried our heads, we've been in good contact with HMRC which is why they've given us such long terms.

More crucial for me of course the liklihood that HMRC will hold me personally responsible for any of the debt. It would risk my wife and kids home if they do, I'm not an exceptionally wealthy person and that £40k is all I have. I negotiated a healthy salary when joining the company (higher end of market rate but not above it) so I'm concerned my salary might even be considered as malfeasance, although that was negotiated before I was listed as a Director, obviously.

So I suppose I'm asking how exposed I am on the following:
- Personal liability of debts owed to HMRC
- Disqualification for unfitness trying to trade our way through financial difficulty
- Disqualification for 50% repayment of loan
- Disqualification for malfeasance based on salary
- Disqualification for trading whilst insolvent if the pre-pack isn't successful

In all honesty, I have no idea how HMRC or IPs view this but am hoping that there are elements that work in my favour. We have a strong trading history, I have only been a Director for 4 months and I also have debts left in the company. I'm desperately worried that my family will be impacted more than the £20k I've lost and everything I read online is making that worse. I've poured all I have into helping this company through difficulty with only a short-term involvement but now I'm worried I've ruined everything for myself.

I'm in a state thinking this could impact my family.

 

[Scalloway]

I'm also concerned that HMRC will disqualify me on the basis of not paying the crown.

It will not be up to HMRC. They can put the company into liquidation for non payment of the debt but it will be the liquidator who is responsible for looking into the director's conduct. From what I have read you would have to be responsible for criminal acts (not poor business management) before disqualification would even be considered.

Have you spoken to a liquidator?

Some one with much more knowledge will be along to answer your situation in more detail but my opinion is that you are worrying unnecessarily.

 

[Lisa Thomas]

Hi Jos

The IP might be acting nonchalantly about the payment because they want to secure the instruction and won't want to scare you off...It's a common tactic some IP firms use, sadly.

I agree there's quite a likelihood that it will be an issue as a potential illegal preference. Was the loan for anything specific - to pay the wages for example?

HMRC won't hold you liable for the company's debt unless they believe you have committed fraud, or have several insolvencies under your belt where HMRC were the majority creditor. This is known as a joint liability order. You can find more information about those here:

Overview of joint and several liability notices for tax avoidance, tax evasion and repeated insolvency

How HMRC deals with customers who are involved in tax avoidance, tax evasion or repeated insolvency who receive a joint and several liability notice, including how notices interact with penalties and safeguards.

www.gov.uk

It's the IP who has the power to lift the corporate veil and pursue you personally for misconduct/misfeasance, not HMRC.

Unfortunately the strong company history has no bearing on their investigation into your conduct - it's what happened when the company became insolvent they will be interested in.

If your salary was at market rate and didn't significantly increase when the company became insolvent I wouldn't imagine that could amount to anything. The issue tend to arise when shareholders are told to stop drawing dividends (because there are insufficient reserves) so they increase their salary instead to try to get around it.

It's highly unlikely you will be disqualified for a potential £20k illegal preference claim. I doubt the Insolvency Services will be interested, especially if you negotiate some form of repayment with the IP.

If the IP told you in writing to continue to trade whilst the company sought a buyer on a going concern basis, and it was based on an agents opinion that there was value in the business that a buyer might be interested in, and the company only paid necessary supplies, then it doesn't seem like wrongful trading to me. It's only where you carry on trading when you ought to have liquidated, and the position gets materially worse, then you might have an issue.

On the face of it, it sounds to me like the £20k might be the only issue here, however I am not aware of all of the facts in the case.

Happy to talk in more detail if you like. Feel free to call me direct on my mobile.