When a business or an inpidual in England and Wales becomes insolvent and is facing bankruptcy there are important legal obligations. One of the principal duties a business has is in respect of the employees and how the procedure is managed. It is most important to closely follow all the procedures relating to employees and other creditors to avoid the severe legal penalties for failing to do so. An inpidual has legal obligations to their creditors.
There are actions that can be taken that can mitigate the situation. The various procedures must be carried out meticulously to avoid errors that could result in sanctions. Professional oversight is recommended, not only to prevent mistakes but to ensure that the best possible solution has been selected under the circumstances.
The options that are available, dependent on whether an inpidual or a business is involved are:
- An inpidual voluntary arrangement (IVA)
- A debt relief order (DRO)
- Company Voluntary Arrangement (CVA)
- Time to Pay Arrangement (TTP)
- Administration
- Pre-pack Administration
- Compulsory Liquidation
- Creditors Voluntary Liquidation(CVL)
- Dissolution
In certain circumstances employees can become secondary preferential creditors of the business and are prioritised above most other creditors.
If the situation is such that redundancy is inevitable and there is no hope of the business continuing, the employer must inform the employees, providing as much notice as possible. An insolvency practitioner will be appointed and the company records and other information must be provided. If the company has ceased trading, the employees cannot work their notice. It the company cannot pay outstanding wages or redundancy or notice pay the employees can claim through the government's Redundancy Payments Service. Employees may possibly be able to potentially claim:
- Holiday pay up to six weeks
- Statutory notice pay
- Statutory redundancy providing that they are eligible. The criteria for eligibility is that the employee must have worked for the business for a minimum of two years. The exact amount of statutory redundancy depends on their length of service and weekly earnings
- Up to eight weeks' unpaid wages
Failure to adhere to the correct procedures can leave the directors facing the severe legal consequences and they can be personally liable if they continue trading whilst knowing or should have known the business is insolvent. The directors may be held personally liable for company debts and be disqualified from being appointed as a director for up to 15 years under the Company Directors Disqualification Act 1986. Additionally, there is a risk of breach of duty charges for acting against the creditors best interests as well as potential misfeasance claims related to corporate mismanagement.
There is also a potential for criminal prosecution for fraudulent trading which could result in a prison sentence if it is deemed that trading continued with the intention of defrauding the creditors. Such actions as hiding assets, accepting orders and payments knowing that they could not be fulfilled is a criminal offence.
The creation of a limited liability company generally protects the directors from personal liability, however, knowingly trading whilst insolvent removes that protection and the directors are exposed to the personal responsibility for the company debts as well as the possible criminal liability as mentioned above.
Giambrone and Partners' lawyers can guide you through the procedures together with an insolvency practitioner and oversee the measures taken. Our commercial lawyers have extensive experience in assisting the directors of businesses close down in an orderly way.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
