General matters affecting directors of failed businesses
Statement of affairs
For most insolvency procedures, directors will be required to prepare a Statement of Affairs ("SOA"). This is a statement of the business's assets and liabilities.
For some types of insolvency such as voluntary liquidation and Company Voluntary Arrangements the SOA would be prepared prior to entering into the procedure. The insolvency practitioner assisting the company would usually assist in its preparation.
For other types of procedure, following appointment the Insolvency Practitioner would write to certain directors asking them for a Statement of Affairs. This is a statutory requirement and there are consequences for directors that fail to provide the statement. In these cases the Insolvency Practitioner may assist the directors in the preparation, however it may be in the interests of directors to seek their own advice over its completion.
Even if an Insolvency Practitioner has assisted the directors in the preparation of the SOA the directors signing the statement will be ultimately be responsible for its contents.
The rationale behind the figures contained in the SOA should be properly documented so that in the event they are questioned, the directors can justify its contents. If third party accountants are instructed to assist in the preparation, the costs would normally be borne by the assets of the business rather than the directors themselves. It is recommended that specialist insolvency and recovery advisors are used since auditors, etc. rarely have the technical knowledge required for its accurate completion.
Questionnaire
For all procedures excluding Members Voluntary Liquidation (a solvent liquidation) and Company Voluntary Arrangements the Insolvency Practitioner is required to report on the conduct of the directors in the lead up to the company's failure. This is a confidential report sent to the Department of Trade and Industry for consideration as to whether to take disqualification action against the directors and whether there are any criminal matters to consider.
Following appointment, the Insolvency Practitioner will usually send directors a questionnaire for completion. This is usually a fairly detailed document covering many aspects of a business.
If a director has concerns over the questionnaire and action taken prior to or during the insolvency they should seek immediate legal advice.
Redundancy and claims for losses
Directors are often the first employees to be made redundant following the appointment of an Insolvency Practitioner. This is usually down to cost and because the practitioner or his/her staff have the expertise to run and sell the business themselves. The redundancy of a director does not affect their responsibility to provide assistance to the practitioner appointed.
Directors are often employees of the business and therefore qualify for payment under the National Insurance Fund for amounts owed (up to the statutory limits). However as directors additional information has to be given to prove that they are true employees.
Any amounts not paid by the DTI will be a claim against the company and they will rank along side others that are owed money, such as suppliers.
Directors loans
If a director owes money to the company then payment will usually be demanded by the practitioner shortly following appointment. Directors may also have to consider their position as certain loans to directors may be considered illegal.
If a director is owed money by the company then this will form a claim and the directors will rank alongside others owed money by the business.
Actions against directors
As outlined in the risk section, legislation has been set up to provide some protection to creditors against questionable transactions or actions taken by the directors; such as preferences (e.g. paying off an overdraft that has been personally guaranteed), continuing to trade when liquidation or other insolvency was inevitable, etc.
Directors should consider taking legal advice should there be any question from the Insolvency Practitioner or creditors.
