Understanding the Difference Between Business Failure and Director Misconduct

There’s been a lot of discussion recently around the Government’s new “Abusive Phoenixism Taskforce” and the tougher action they will take against directors who misuse insolvency procedures to walk away from their company’s debts.

It is apparent to us that some business owners have read the headlines and are quietly panicking.

One recent conversation particularly resonated with us; two directors sought advice with regards to placing their company into Liquidation.  Before we even got into the financial position, one of the first questions they asked was “Are we going to be treated like criminals?”

The reality?  From our initial review, they had taken many of the correct steps:

• They had stopped taking out credit and incurring debt.
• They had been open with their creditors.
• They had taken professional advice.

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They had tried to trade through difficult circumstances rather than simply walking away and ultimately, they had reached the difficult conclusion that the company could no longer continue.

That is not what the Insolvency Service is targeting.

Most directors we meet are not dishonest people trying to avoid their responsibilities.  They are ordinary business owners carrying huge pressure, often admirably trying for too long to save a business they have spent years building.

Sometimes they have missed the warning signs.

Sometimes they have seen them but genuinely believed things would improve.  

Sometimes they have kept funding the business personally, long after it made financial sense to do so.

That is very different from deliberately abusing an insolvency process.

The new Taskforce is aimed at directors who repeatedly leave company debts behind, misuse dissolutions or liquidations, avoid tax liabilities, conceal assets and divert trade into new companies to the detriment of creditors.

There is a world of difference between a genuine business failure and director misconduct.

Unfortunately, many directors do not understand that distinction until they sit down and have a proper conversation with an experienced insolvency professional.

One of the things see regularly at Certus is Liquidation itself not being evidence of wrongdoing.

Companies fail for all sorts of reasons:

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• cashflow pressure,
• loss of customers,
• economic conditions,
• HMRC arrears,
• late payment from customers,
• rising overheads;
• or simply running out of energy trying to hold everything together.

One of the most important things is how directors behave once they realise there is a problem.

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• Taking early advice matters.
• Being transparent is imperative.
• Keeping proper records is crucial.
• Trying to minimise losses to creditors is key.

These are real situations involving real people,not just legislation and headlines.

Sometimes the most valuable thing we can do in an initial meeting is simply help directors understand where they actually stand.

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