Act responsibly when faced with insolvency
The number of businesses in Scotland facing financial distress is on the rise. That’s according to recent figures released by the Accountant in Bankruptcy, the Scottish Government agency that oversees individual and business insolvency.
In February 2024, 94 companies went into liquidation, a rise of 9 per cent compared to February 2023. In the last full quarter from 1 October-31 December 2023, 292 companies appointed a liquidator, an increase of 7.4 per cent when compared to the same period in 2022.
Directors of companies have a range of responsibilities, some of which are placed upon them by the Companies Act 2006. Prioritising the success of the company for the benefit of shareholders is one of these responsibilities. However, when a business is facing insolvency, the duties of a director changes.
Creditors take precedence in insolvency situations and directors must consider their interests and act in a way which minimises any potential losses they may suffer. Directors must also consider the interests of other key parties, including employees and shareholders.
In my line of work I deal with people who are directors of companies across a whole variety of sectors. All too often I find they have the same thing in common – an unrealistic belief that they can trade their company out of financial difficulty. Continuing to operate when there is no reasonable prospect of a company avoiding liquidation is known as wrongful trading.
Directors who continue to trade an insolvent company knowing that it can’t pay its debts could be guilty of the offence of fraudulent trading.
The consequences for directors not complying with their duties can be severe. Individuals can be found personally liable for the company’s debts. They can also be disqualified from acting as a director for up to 15 years and may find themselves in court charged with committing a criminal offence. Those convicted of fraudulent trading can be sentenced to up to ten years in prison, given an unlimited fine, or both.
Given these penalties, directors who fear their company is unable to pay its debts should obtain expert advice from a lawyer or accountant with experience in insolvency matters.
It’s important to be able to demonstrate that the situation, and the director’s responsibilities, are being taken seriously and to take the right steps for everyone involved.