Frequently Asked Questions
Director FAQs
What are my personal liabilities?
Directors as a rule are not personally liable for the debts of the company. This is the main reason for setting up a limited company in the first place, in order that shareholders and directors liabilities are limited. The company is known in law as an artificial person, and is an entirely separate, distinct legal entity which owns the business assets and is liable for the business debts. Shareholders are only liable for any unpaid share capital, which is usually neither here nor there.
What about personal guarantees?
Directors can often be faced with Personal Guarantees, usually to the banks and asset finance companies, landlords and certain types of trade creditors, such as building merchants. Basically if you have signed a guarantee you will be liable for whatever shortfall the creditor suffers in the Liquidation. Where guarantees have been given by more than one guarantor, on a joint and several basis, the guarantor with the most personal assets, is the one who stand to lose more, as any of the guarantors are potentially liable for the total debt. They may then be faced with trying to recover the shares of the other guarantors from them directly, which is not always possible if they have no personal assets left. Directors who are on the hook for potentially large guarantees can be motivated to keep trading in order to prevent these personal liabilities crystallizing and the subsequent debt enforcement action that would follow. This can lead to the company trading whilst insolvent.
Can I be made personally liable for any debts?
By incurring additional trading losses and increasing the liabilities significantly (often to the Crown for PAYE/NIC/VAT - who tend to take a dim view of such behaviour), the Directors are potentially exposed to personal liability for some of the debts. This personal exposure risk is due to the powers of the Liquidator to take action against a Director to make a personal contribution to the Liquidation, if there is evidence of insolvent trading and that the Director knew the company was insolvent, but instead of ceasing to trade, carried on and the situation got worse, not better. However, in reality, for directors of small companies, the risk of an insolvent trading action is low, as funds are often not available for the legal costs of an application to the High Court. In many cases, Directors can point out to reasons why they genuinely believed they could trade out of the insolvent position, such as the prospect of a cash injection from a new investor, or a profitable new contract in the pipeline. Only in extreme cases, where the Directors have clearly acted recklessly will action proceed.
What is the likelyhood of being banned as a director?
While the Liquidator will not, in the majority of cases, be in a position to pursue an insolvent trading action under s214 Insolvency Act, he is required to report the matter to the Disqualification Unit who will then consider going after the Director for a ban of around 2 - 5 years in smaller cases (it can go to 15 years, the highest I have dealt with was 11, the lowest 2). Again Directors Disqualification proceedings are at the High Court and are scary expensive, Directors are looking at around £100k in legal fees. Hence when the BERR Disqualification unit offer the director the alternative of an undertaking pretty much nobody can afford to fight it through the High Court, because if the Directors lose, they are liable for the Governments legal fees. All in, the potential cost of fighting and losing is around a cool quarter of a million quid on a good day. Who can afford that? The alternative is that for no legal costs a Director gives an undertaking to resign his or her directorships for an agreed period of generally not more than 5 years for smaller companies, and the whole thing goes away. Apart from insolvent trading, other issues of unfit conduct that can be reported to the disqualification unit include: ? Misuse of Crown money ? Making preferential payments ? Transferring assets at an undervalue ? Failing to maintain proper accounting records and make statutory returns ? Breach of Fiduciary Duty to act in the best interests of the company ? Misfeasance ? Retention of company property ? The extent of the director?s responsibility in the company failure ? Failure to cooperate with a Liquidator You can have look at the most recent undertakings given by directors on the insolvency service website, the most common reason for being done is misuse of crown monies. The reality of insolvent trading is that the real risk is it could lead to a ban as a director, therefore deciding when to "pull the plug" is paramount.
Where do I get advice and what is a licensed insolvency practitioner?
Taking advice is important, and the sooner the better, as it is likelythat you will have more options to consider. The later you leave it, the less options you will have have. Qualified and experienced Licensed Insolvency Practitioners have the skills and legal powers to deal with formal insolvency procedures, at some point if you wish to place a company into Liquidation or Administration you will need to instruct an IP. An Insolvency practitioner is half accountant, half lawyer, with substantial statutory powers granted by the Insolvency Act when acting in an official capacity As a profession we IP's are little known and poorly understood, with a perpetual chip on our shoulder because nobody likes us - nobody, and I mean nobody wants to be doing business with us, we are the business equivalent of the paramedic, surgeon, undertaker and grief counsellor, all rolled into one. Every director would prefer to find a solution without having to call in an IP. But when it becomes necessary to call in a professional who can arrange for the company to seek the legal protection of the courts either via Liquidation or Administration, at that point an Insolvency Practitioner is required by law to act in person as the office holder, i.e. as a Liquidator, or Administrator of the company, he can then take control of the situation to try and ensure the best outcome for all parties, which can be a difficult and usually thankless task, especially when we usually get the call for assistance very late in the day. It is always the case that calling the IP in is a last resort, a decision made by directors with great reluctance. As the active, initial phase of a case concludes, I am used to shaking a director by the hand and wishing him well, and he thanks me for my help, and with no offence intended (or taken) tells me heartily that he hopes he never sees me again.
Sole Trader, Consumer Debt & IVA FAQs
What is a debt management plan?
A Debt management plan is an agreement between yourself and creditors brokered by a Debt Management company who agree to collect and pay over monthly instalments to your creditors. Some people can restructure their repayments into a more convenient plan and you won't necessarily have to sell your home as part of the agreement. However, Interest usually continues to be charged so it takes years to reduce the debt. Debt Management Plans are becoming increasingly popular with banks and credit card companies who see a better return over a longer period than is the case with an IVA, and of course, Bankruptcy, which offers the lowest average returns to the Banks and credit card and asset finance companies.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement is a contract between you whoever you owe money to, - you creditors. You pay an agreed monthly amount, almost certainly for 5 years to your Supervisor, a Licensed Insolvency Practitioner of your choice. The Supervisor takes his fees from the fund and pays the balance to your creditors in proportion to the amount of their debt. If the payments are made on time as per the agreement, the debts are deemed to be settled in full and final settlement of all claims.
What Monthly Amount will I be required to pay?
The monthly payment varies depending on your income and expenditure, and will only be agreed if it is realistic and affordable. You will be required to submit a detailed income and expenditure statement each year, and if you are deemed to be able to afford to pay more, the amount will be increased. If you cannot afford to keep up with payments, you may be deemed to be in default, and be made Bankrupt as a result. It may be possible to vary the IVA with the consent of creditors to avoid the IVA being failed and you being made Bankrupt.
Are there any other options?
You could contact your creditors yourself, in writing, and negotiate a payment plan with each one separately. This is worth trying where your debts are lower than the IVA debt cut-off level of £15,000. Some banks and building societies have debt counsellors, and may be the best point of contact when looking to agree a payment plan. The downside is that any agreement is not legally binding, unlike an IVA. One or more of your creditors could change their mind at a later date, or charge you higher rates of interest later if your circumstances improve.
What are the advantages of an IVA?
> You make one payment to your Supervisor by direct debit each month.
> When your IVA is approved, all of your creditors are legally bound by its terms, as long as you keep to your side of the agreement, by paying your agreed monthly sum and complying with any additional conditions such as realising the equity in your house in the final year of the IVA.
> Once the agreed term of your Individual Voluntary Arrangement is over (almost always 5 years for payment plan IVA?s) your debts are settled, legally speaking in full and final settlement.
> Your employment should not be impacted. There is no legal requirement to inform your employer, there is no advertising of your IVA, although it will show up on a credit check.
>Your employer will therefore only find out about your IVA if you choose to discuss with anyone at work.
> Unlike bankruptcy, your details will not be advertised in the local press and you are able to act as a Director of a Limited Company. Professionals who would lose the ability to practice or who may lose their jobs if made Bankrupt, can use the IVA to recover their financial position and maintain their professional career and income.
What do I need to do?
Before your IVA proposal is put to creditors you need to sign it as a "Statement of Truth". You do not need a solicitor for this: you simply read it and sign it. We prepare all documentation for you and also contact your creditors on your behalf (and if necessary we will make an application on your behalf to your local County Court for an "Interim Order"). A creditor meeting will then consider your proposal. You will not usually need to attend as typically the voting is done by proxy instead. Even if creditors do attend, the meeting usually only lasts for between 15 - 20 minutes. We will chair the meeting, and you need to be available at the end of a phone line during this period.
What else should I know?
You might actually pay more out in an IVA than you would if you were made bankrupt. This is because bankruptcy income contributions usually only last for 3 years, whereas contributions in most IVAs last for 5 years. This voluntary increase in the total payment should make your creditors sympathetic to your proposal.
Will my home be safe?
You will not usually have to sell your property when in an Individual Voluntary Arrangement. In the years since the IVA was invented in 1986, it has become a requirement by the banks that to have your IVA accepted, if you do own your home, you need to take reasonable steps at the end of the five year period to make any equity available to your creditors (usually by re-mortgaging or being helped by a family member). However, in 2008 as the property market goes from boom to bust, things may change.
What if my creditors don't agree?
At least 75% of votes (in value) at your creditor meeting must be in favour of your proposal. Creditors can suggest modifications to your proposal and you can choose whether to accept them or not. If your creditors don't vote in favour you will still have the option of an informal arrangement, or bankruptcy.
Do I have to pay any costs?
In an IVA all you pay is the amount you can realistically afford, each month for the period of your arrangement (usually 60 months), and that is literally all you have to pay as long as you keep up the payments. In return, your creditors agree to write off the debt you can?t afford to repay and pay the Supervisor?s fee out of the payments you have made into your IVA fund.
What do I need to do if I want to go Into an IVA?
You need to apply to a Licensed Insolvency practitioner to act as your Nominee, If he agrees to act, having assessed that your circumstances afford you a realistic prospect of putting forward a viable proposal that stands a good chance of being accepted by your creditors, he will guide you the process from start to Finish. It is normal for your Nominee to act as the Supervisor of your IVA when your IVA proposal is approved by your creditors.
Once you have been accepted as a client by your Nominee, you will provide all the necessary financial and background information requested then you will be asked to sign a "Statement of Truth". Your Nominee will prepare your IVA proposal and related documentation for you, deal with any county court formalities, put your proposals forward to your creditors on your behalf, if necessary negotiate on your behalf if creditors won?t accept the first offer.
A creditor meeting will then consider your proposal. You won?t need to attend in person as the voting is usually by post. Even if creditors do attend, your Nominee will act as chairman of the meeting, and you must be contactable by telephone in case there are any last minute negotiations to be agreed or rejected.
What are the downsides of an IVA
You usually pay more out of your future income in an IVA than you would if you were made bankrupt. This is because bankruptcy income contributions usually only last for 3 years, and are usually set lower than for IVA, whereas contributions in most IVAs last for 5 years. This voluntary increase in the total payment should make your creditors sympathetic to your proposal. The main risk in an IVA is that at some point during the IVA period, you fall behind with your payments or otherwise default on the terms and conditions, at which point you will almost certainly be made bankrupt as a condition of the IVA. You may feel that the IVA was a waste of time at that point and you should have taken the Bankruptcy and gotten it over with. Bear in mind that the normal duration of Bankruptcy is now one year. If you are in doubt about whether to try an IVA or just file for Bankruptcy, it is worth considering that if you try an IVA and it doesn?t work out, and you end up Bankrupt anyway, you will at least know that you tried your best to avoid Bankruptcy, but it proved to be impossible. If you go straight to Bankruptcy, you may end up wishing you had tried the IVA! At this point in the decision process, you should seek the advice of an Insolvency professional who can advise based on your actual circumstances.
Is a secured loan or remortgage right for me?
This is down to individual choice, mortgage rates are usually lower and set up fees higher than those of loans because of the length of time involved and your home will be at risk in with both a remortgage and secured loan if you cannot meet the repayments. The falling property market and credit crunch will make this option difficult to achieve until market conditions improve.
Will a consolidation loan help me?
If you can consolidate all of your existing debts into a loan that offers lower total repayments then a consolidation loan might be the best solution. This might not be possible in many cases as most people who are experiencing serious financial difficulties have a poor credit rating.
What is a Debt Management Plan?
What is a Debt Management Plan?
What is an IVA?
What is an IVA?
What monthly amount will I have to pay in an IVA?
What Monthly Payment will I have to Pay in an IVA?
Bankruptcy FAQs
What is Bankruptcy?
A Bankruptcy order is a court order that you can apply for if you can demonstrate to a Judge at County Court that you can't afford to pay all of your debts. One of your creditors can apply for a Bankruptcy Order to be made against you if you owe them more than £750. Bankruptcy affords you the protection of the court from your creditors. Once the order has been made, they are no longer allowed to pursue you for the debt, ever again. This allows you to free yourself from overwhelming debt and make a fresh start. A Trustee in Bankruptcy, (the person appointed to deal with your assets) sells any assets of significant value (not household goods) and distributes the proceeds to your creditors to recoup as much debt as possible.
After your bankruptcy ends your creditors can't make further claims against you for your debt.
The fact a bankruptcy order has been made in your favour/against you is advertised in the local press, your landlord is told and your employment may be at risk in some occupations and professions.
How long will I be bankrupt?
The general rule is that you will be discharged after a maximum period of twelve months, when you are no longer a bankrupt. This period can be shorter should the Official Receiver complete his enquiries earlier and file a notice to that effect in court. Straightforward cases are currently being discharged in an average of 6 months!
The duration of the bankruptcy can also be altered in the following circumstances:
The court annuls the order on the grounds that all debts have been paid in full.
The court annuls the bankruptcy on the ground that the original order was not appropriate
The discharge has been suspended as a result of failure to co-operate with the Official Receiveror Trustee. Only after the breach causing the suspension has been rectified will the twelve month period continue.
Although you are no longer bankrupt once discharged, it will remain on your credit history for 6 years from the end of the Bankruptcy (this also applies for an IVA, i.e. 6 years after the end of a 5 year IVA).