What directors need to watch out for
The changes seek to make company directors even more accountable for their actions. At the same time, they introduce new rescue tools for financially distressed companies. These measures are as follows:
- A new company moratorium.
- Allowing the insolvency service to investigate the conduct of directors of dissolved companies.
- Additional recovery powers for insolvency practitioners where asset value is extracted from a business pre-insolvency.
- Responsibility to demonstrate how the pension pot and salaries can be covered before dividends can be paid.
- Additional scrutiny of sales of subsidiary businesses.
Some of these these changes are in direct response to high profile collapses such as BHS and Carillion. Others have been introduced to ensure smaller companies do not shut down without appropriately dealing with their debts. This article will focus on the latter, and especially the changes to company dissolution.
When is company dissolution appropriate?
There are very limited circumstances where dissolution is an appropriate way to wind up a company at the end of its life:
- All company debts have been paid.
- All salaries and redundancy payments have been paid to employees, including board members.
- The company pension scheme has been finalised appropriately.
- All payments have been made to HMRC and tax accounts closed.
- The company assets have been sold and there is less than £30,000 to distribute to shareholders.
Based on the government announced changes, if these actions are not taken before dissolving your company, you are likely to face director disqualification.
Action will be taken by the Insolvency Service if a complaint is made against the dissolved company. We expect HMRC and the pensions regulator to be prolific with this where company director haven’t filed accounts or returns or have outstanding queries. Further to these, we expect to see disgruntled employees and trade creditors using the complaint as a method of holding rogue directors personally responsible.
The system is likely to be very accessible, meaning employees due small amounts of wages can file a complaint to the insolvency service through an online form.
Importantly for company directors looking to company dissolution, if you were to be disqualified as a director, not only can you be disqualified for 2-15 years, but also subject to a compensation order. At worst, this could make you personally liable for the debts of the dissolved company.
What if my assets exceed £30,000?
If the company assets exceed £30,000 to be distributed to shareholders, it may be worth placing the company into a members voluntary liquidation. If you qualify against HMRCs criteria to make a capital distribution of these funds, you may also qualify to claim entrepreneurs relief upon liquidation.
On a distribution of £30,000 this would mean that rather than paying £9,100 in dividend tax, based on a higher rate taxpayer, you would pay only £3,000 in capital gains tax. This would be at a rate of 10% with entrepreneurs relief. Even with the costs of liquidation and making the claim for entrepreneurs relief, this is likely to generate a saving on the distribution of the final company funds.
What if I cannot meet staff redundancy entitlements?
For a company that has been running for a significant period, with long serving staff, statutory redundancy entitlements can be significant.
Statutory redundancy accrues on each year of service, after 2 years served, as follows:
- Half a week’s pay for each year served aged under 22.
- One week’s pay for each year 22 or older.
- One and a half week’s pay for each year 41 or older.
While this is capped at 30 weeks redundancy pay or £15,240 per employee, this is still a significant payment for a closing company to make without significant reserves. This is where the redundancy payments service comes into play.
Upon the voluntary liquidation of a company, the redundancy payments office will pay employees their statutory entitlements in place of waiting for the company to have sufficient realisations to pay the staff. This also includes remuneration due to board members. In particular, where they have sacrificed their own salary to keep the company running.
The government crackdown of dissolution focuses particularly on unpaid wages and pension schemes. This is due to the redundancy payments service not covering these payments where a company has been dissolved, compared to them being paid in liquidation.
This has left countless employees out of pocket resulting in these changes. Dissolution should no longer be seen as a way of avoiding liquidation, but another process baring consequences if it is abused.
What if I cannot afford to liquidate my company?
When faced with the prospect of being disqualified as a director and potentially being made personally liable for company debts via a compensation order, it may be time to look at what is really affordable for a liquidation. One option may be to wait for a creditor to issue a winding up petition against your company.
However, if there are no apparent assets, this is unlikely to happen. If the company becomes subject to a compulsory strike off in the interim, there is a risk of the dissolution liabilities arising outside of your control.
We have previously covered off how liquidation can be made more affordable which can help meet these costs.
If you are uncertain as to whether dissolution would put you at risk of personal liability, our BusinessRescueExperts can provide you with a free company dissolution review. If dissolution would put you at risk of personal liability, they can discuss how the costs of liquidation can be mitigated in your circumstances.