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Company Insolvency Myths

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There are many myths and misconceptions regarding Insolvency and Insolvency Practitioners and so this post has been designed to help answer and correct those issues about insolvency you are not sure on.

Insolvency Practitioners are on the Directors side as they are the ones paying their fees

This is 100% not true. Insolvency Practitioners work on ensuring a non-bias to any parties involved with the company and are paid from the assets of the company.

Being a director of a company that is insolvent will stop me from being a director of another company?

This is not automatically true. If during the director investigations you are cleared of any wrongful trading then there is no reason as to why you cannot go on to be a director of another company. However if you are found to have performed misconduct while trading an insolvent company, then a ban can be implemented by the Secretary of State for up to a maximum of 15 years.

If I put my company into a pre-pack administration I can buy it back cheap without its debts and creditors

A pre-pack admin is a process which allows for continuous trade of a company despite entering into the Administration process. It is not a cheaper route for the director or for another party to purchase the company and its assets. A fair price must be sought out otherwise it could be claimed that the assets are being undervalued. In order to achieve this, an independent valuation of the business and assets must be sought from a reputable firm.

If found guilty of misconduct I will go to prison

Imprisonment is only going to feasibly occur in the most severe cases of wrong-doing and is rarely seen. The most common form of action against a director who is proved guilty of wrong-doing is receiving a ban from performing the role of director within another company. This ban can reach up to 15 years however this again is appears to be reserved for the most severe of cases.

I can pay off some creditors before others as I promised them their payment first

In the lead up to a company closure if a creditor is paid in priority to another creditor when it could be seen that they were a newer or less overdue debt then the liquidator will need to look at these transactions.

In order for a preference to be proved against the creditor and the payments recovered from the creditor then the liquidator will need to show that the payment was made to purposely put the creditor in a better position. This can prove difficult to gather enough evidence to show this.

However, if the preference payment is to a connected party then the “on purpose” part of the proof is assumed and so a payment can be more easily reversed.

The banks will never lend me money ever again after liquidation

Banks will generally assess each situation individually and therefore this question cannot be fully answered. Liquidation should not prohibit you from borrowing money but whether the banks will lend to you or not is under their discretion.

Different banks have adopted different policies on whether they will fund a “phoenix” as they call it. In reality, it is common practice to have a few weeks’ notice before a decision is taken to liquidate a company and a new bank account is set up before the liquidation commences.

I will lose my home and personal assets if I enter liquidation

As long as no personal guarantees were given to any creditors then your personal assets will not be affected by the liquidation process.

If personal guarantees were made then it will depend on the amount owed to determine whether or not personal assets will be used for payment. It should be remembered that a lender should normally take first security against the company assets before a persona guarantee is pursued.

Insolvency will hurt my credit rating

Entering into a corporate insolvency will not affect your personal credit rating. With a personal bankruptcy, the insolvency information will unfortunately be on your credit report for up to 6 years.

I am a bad person for filing for insolvency

Not at all! Sometimes bad things happen to good people and it is no-one’s fault. Insolvency events happen to the biggest companies down to the smallest. Provided that your trading has been exempt from misconduct then there is no reason to blame yourself for this occurrence.

It is a harsh reality of business that limited companies were created to encourage risk taking and to protect directors and shareholders from a company’s failure where they have not acted wrongfully.

Everyone will see I have filed for insolvency due to the public advertising

The only editorial which insolvency and liquidations are advertised is called the London Gazette. This paper is solely for the use of advertising such information and therefore is not read much if at all by the public. The only way which your situation will become common knowledge is through word-of-mouth and this is something that cannot be controlled.

Though be aware that from time to time a local paper may pick up on a closure by word of mouth and choose to publish a public interest story on if a high number of employees have lost their jobs.

If you need to discuss any of the topics discussed in this article then please do not hesitate to contact us today. Here at FA Simms & Partners we have 35 years of experience in both corporate and personal insolvencies. When you call us you will always be able to speak to a Licensed Insolvency Practitioner and therefore you will always receive the highest standard of help and advice on your situation.

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