Life is tough for businesses of all kinds at the moment, with high interest rates, prices and wavering consumer confidence battering their balance sheets and threatening their future.
According to recent government figures, there were 2,002 registered company insolvencies in England and Wales in December 2023. That’s up 2% from the same month in 2022 and almost double that recorded in pre-Covid December 2019.
Figures from accountant Price Bailey, published just before Christmas, revealed that a record 463 British haulage businesses had collapsed in the last 12 months. That’s up from 225 in 2020/21 and 363 in 2021/22.
For any company director going through insolvency, there will be a huge amount of professional and personal strain as they see their, their families’ and their employees’ futures put at risk. Added to this are a number of statutory legal obligations that they need to follow. Getting these wrong can have serious consequences including, where a director’s conduct is called into question, being banned from acting as a director or participating in the management of companies for between two and 15 years, financial penalties, or even a custodial sentence.
So, what do haulage directors need to know? A company becomes insolvent if it can’t pay its debts when they are due, or if it has more liabilities than assets on its balance sheet. If addressed early enough, there may be options available to try to prevent insolvency, from looking for refinancing or new investment to marketing and selling the business, or agreeing repayment terms with creditors.
If these aren’t possible, then directors should be looking at formal insolvency proceedings to avoid worsening the position of creditors. This could mean entering into a company voluntary arrangement (CVA), putting the company into administration or liquidation – the latter being where the company is closed down and its assets sold and distributed to creditors.
Directors of an insolvent company have a statutory duty to act in the best interests of a company’s creditors from the time that the company is insolvent or bordering on insolvency. They should consider seeking guidance from solicitors and/ or a licensed insolvency practitioner (IP) to help explore their options and mitigate the risk of personal liability for the hard decisions ahead of them. If directors don’t take action themselves, insolvency practitioners can also be appointed, as administrators or liquidators, by creditors or, in some cases, the government.
Creditors can take action against an insolvent company including applying for a winding-up petition to close it down. This can have immediate ramifications, because once a winding-up petition has been filed and advertised, it becomes public knowledge. Banks will automatically freeze company accounts and the reputational damage may be beyond repair.
“As a director, you need to be as transparent as possible both with informing the traffic commissioner of a potential material change to your O-licence (see box on p23) and your creditors,” says Kelly Heyworth, senior litigator in the commercial litigation team at Stephensons Solicitors.
Emma Taylor, an insolvency partner at solicitor Browne Jacobson, adds: “The earlier you can react to a situation where a company is entering into a stressed state, the better, as there are likely to be more options available to you.”
Directors, she adds, should monitor the company’s financial situation by looking at cashflow projections and forecasts, and determining where pinch-points might arise. “Their eyes should always be open to quickly spot where problems might be coming from, especially at a time in the haulage sector when prices and overheads have gone up and volume may be down. You can’t just hope for the best. Be objective, and if you notice a steady decline, be alert to the fact that you may be heading towards insolvency,” she says.
Heyworth adds: “Have a frank chat with your company’s accountant or take immediate legal advice. If you don’t, there could be legal ramifications ahead for you.”
One of these is related to your duties as a director. During solvent times, a company director’s primary legal duty is to promote the success of the company for the benefit of its shareholders. However, if the company is insolvent, then that focus changes.
“When a company is bordering on insolvency or is insolvent, then the director’s primary duty switches to acting in the best interest of the creditors,” Taylor explains.
“So, identifying when your company has reached that point is absolutely critical for a director. It isn’t obvious, it isn’t black and white, but they have to show that from that point in time, the decisions they were making were made with the creditors at the forefront of their mind. Keep a record of what you are doing because, ultimately, if an insolvency practitioner is appointed, he or she will be looking at your actions in the lead-up to the insolvency. In the worst case, this could lead to directors being held personally liable for losses suffered by the company and/or its creditors.”
Indeed, insolvency practitioners will submit a report about the director to the government covering the last three years of trading, within three months of the company’s insolvency.
Directors can be guilty of wrongful trading where they carry on trading past the point that they know, or ought to have known, that they weren’t going to avoid an insolvency. Perhaps they invest in a new service believing, too late or without objective justification, that this could lead to a turnaround. However, they have failed to put the creditors’ interests first and end up being liable to personally pay back company debts and potentially face disqualification.
Fraudulent trading is, according to IP AABRS, a criminal offence when directors continue to trade and deliberately avoid paying their liabilities. Actions could include taking payment on credit from customers knowing that an order will never happen before liquidation, or selling company assets for below their real value. It must be proven by the IP that directors knowingly did this and, if found guilty, they could go to prison.
“Wrongful trading is, generally speaking, the main worry for directors where insolvency is a risk, especially if they haven’t taken early action and don’t have the benefit of legal advice,” says Taylor.
“Claims may also arise if the directors have intentionally preferred one creditor over another, such as a family member, friend or other connected party, when repaying debts, or if they have transferred assets at an under-value. Those transactions can be overturned, and the funds clawed back.
“They may also lead to claims against the directors for breach of duty if authorising those transactions was not in the best interests of creditors as a whole. If claims made against a director result in financial obligations that they are unable to pay, then the hard reality is that personal insolvency issues might then arise.”
In addition, Taylor says directors also need to remain aware of how best to manage their employees during this time. It can be another huge strain.
“You could be a small family-run company with an open-door policy to staff, but suddenly you enter a period of financial distress. Sharing the information about a possible or actual insolvency may not always be a good idea because the mood in the office could change,” she states.
“Directors will also have to consider whether revealing everything to staff is really in the best interests of creditors – especially if that duty might best be realised by trying to sell the business as a going concern and retaining the workforce. If you tell staff too soon, or before the details are finalised, they might understandably be nervous and decide to leave. A staff exodus might impact your ability to continue trading while a sale is negotiated or finalised, or may even jeopardise the sale altogether. It is a very fine balance.”
Directors also need to be careful to abide by employment law regulations if redundancies are made either in a CVA, administration or liquidation event, or just to reduce costs.
Employees can make claims to employment tribunals if, in certain circumstances, the employer did not hold a consultation about their redundancy or failed to inform or consult with them about Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
“Act quickly if you are a director,” says Heyworth. “But take advice and also be careful what you say and who you say it to. It doesn’t take much for the rumour mill to start, particularly in the transport industry. A lot of the ongoing service contracts have clauses that allow for termination in circumstances of insolvency. So, remain cute about it until you know exactly where you stand.”
- This article was previoulsy published in Commercial Motor, to subscribe see the latest Commercial Motor subscription offer
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