Company failure: dealing with difficult questions

It is an accepted part of the corporate landscape that some companies experience insurmountable financial challenges and fail, although the Meston Reid & Co experience is that when directors seek advice at an early stage and have the courage to make the appropriate operational/financial adjustments, the chances of corporate survival are enhanced considerably.  A company may become leaner and fitter, and thus better equipped to deal with today’s business challenges.  The Meston Reid & Co insolvency team are consulted regularly by directors of financially challenged companies, large and small, and certain questions nearly always feature during the first meeting.

Some people feel awkward about asking difficult questions, perhaps because they feel embarrassed, feel they should know the answer anyway, or worry that they expose themselves to an accusation of poor business judgement. However, if one does not ask a licensed insolvency practitioner  for advice when corporate financial challenges emerge and prefers to rely upon “ my mate in the pub”, it is not surprising that many decisions are based upon incorrect information at a time when it is vital to have a clear focus.

Will I be made bankrupt if my company is liquidated?

Unlikely, and certainly not an automatic outcome. A company is a separate legal entity and corporate failure does not necessarily mean that personal insolvency will follow.  If you have signed a personal guarantee that cannot be settled when called upon by a bank, or have an overdrawn loan account which cannot be repaid when the liquidator asks, the spectre of personal insolvency might arise.  In such examples, careful thought is required about how to deal with the personal financial impact of the company collapsing, including how you will generate income in the short term until another job is found.

Can I be a director of another limited liability company in future?

Likely. Unless you have court permission ( which is an infrequent occurrence ), section 216 of the Insolvency Act 1986 prohibits you from being a director of a limited liability company with the same name/brand for the 5 year period from date of liquidation if you have been a director of the company at any time in the last 12 months.  Subject to this, and assuming that The Insolvency Service does not instigate action to have you disqualified as a company director, there is nothing to stop you being a director of another limited liability company in the UK.

You may care to note that if you have been a director of XYZ(1) Limited and XYZ(2) Limited which have both traded in the public domain for the last 12 months, and XYZ(1) Limited is liquidated, you can remain a director of XYZ(2) Limited.

If the company is subject to administration rather than liquidation, these restrictions don’t apply unless the administrator converts the process into a liquidation as part of the exit strategy from the insolvency process. This means that careful planning/understanding is required at the outset.

Will I lose my pension entitlement within the company scheme if liquidation occurs?

Probably not.  A pension scheme is a separate entity from the company whose assets are administered by trustees.  Unless the liquidator can show that unrealistically large contributions have been made to the pension scheme shortly prior to inception of formal insolvency proceedings e.g. to line your pocket rather than pay creditors, the monies are ring-fenced and not available to company creditors.When a company faces financial uncertainty many questions arise and if a director feels under pressure, clear and concise information is required such that executive decisions can be made.

The views expressed in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent the views of the firm in general.