Myth Busters: 7 misconceptions directors have about insolvency

26 March 2024

Are you a company director looking down the barrel of insolvency? If you are like most of the clients I’ve worked with over the years, you probably know less about the process than you think you do. Today, I am pulling back the curtains to reveal the truth behind the insolvency process, starting with debunking some of the most common myths.

Myth 1: You will never be a company director again.

Presiding over an insolvent company doesn’t automatically disqualify you from serving as a director, now or in the future.

This myth has its origins in an assumption that directors are to blame when a business collapses. The truth is companies fail for a lot of reasons – market upheavals, economic instability, even shifting customer tastes. None of these are your fault, so unless you are guilty of misconduct, negligence, or fraud during your time as company director, you are free to move on with your career however you choose.

Myth 2: Company directors are personally liable for corporate debts.

Your company’s limited liability protection should shield you from its debts. Your company is a distinct legal entity, entirely separate from the directors who own and run it, so in most instances your company’s creditors will be repaid by selling off the company’s assets, not by you.

Does this sound too good to be true? Well, there are some exceptions to the rule. If you have signed a personal guarantee for any company loans or credit cards, you will have to repay them if the company cannot. You could also lose your liability shield if your actions contributed to the company’s failure, or you are guilty of misconduct or fraud. You can guard against this by seeking early advice from an insolvency practitioner. There are strict rules about what a company can, and cannot, do during insolvency, and it can be easy to fall foul of them if you lack the necessary legal expertise.  

Myth 3: The insolvency will appear on your personal credit report.

Your personal credit rating should not be affected by the liquidation of your company, unless you have defaulted on debts you personally owe.

If the liquidator finds you liable for any of the corporate debts, you will need to pay these back in good time or risk a County Court Judgement being filed against you. These can stay on your credit report for six years so it important to act fast to arrange affordable repayment plans with your creditors. The same holds true for any creditors you have made personal guarantees with. 

Myth 4: You cannot buy back an insolvent business and its assets.

If you can offer a better price or terms than other potential buyers, it is possible to purchase your businesses assets from its insolvency practitioner. You can then start afresh, free of any debts the business accrued.

This is called a phoenix company, because your new business is literally rising from the ashes of your old one, and it is entirely legitimate assuming you abide by the law and do not try to abuse the insolvency process.

Fairness and transparency are key. But expect your conduct as director, and the causes of your company’s failure, to be investigated to ensure everything is above board. There are laws to prevent unscrupulous directors from establishing a new company simply to escape paying their creditors. 

Myth 5: Any new business you start cannot use a similar name or trading style.

While it is true the Insolvency Act prohibits directors from simply jettisoning one company and transferring the brand name on to another, this does not apply if you purchase your company from the insolvency practitioner. It is also possible to ask the courts to grant you permission to continue trading under a similar name after your company goes into liquidation. Both these options involve some tricky legal issues however, so be sure to seek professional advice before proceeding.

Myth 6: You cannot re-employ staff you have made redundant

When you company goes into liquidation your employees will automatically be made redundant, but there is nothing to stop you from offering them a job with any new business you set up. In fact, UK law currently places no restrictions on a company re-employing staff after redundancy at all.

If you do re-employ some of your staff, it will not affect their rights to claim redundancy payments or monies owed to them from the liquidated company, so employees have nothing to lose from returning to work for you.

Myth 7: Your suppliers will desert you.

This is not necessarily the case. If you have acted in good faith and treated your suppliers with respect and honesty, then hopefully they will have no reason to refuse to work with you again. They may be understandably wary of offering you lines of credit however, at least until you have demonstrated the solvency of your new business. Respect this, and let the relationship grow at its own pace.

With your misconceptions about insolvency quashed, hopefully you now feel better prepared for the path ahead. But if you need further advice, you can always book a consultation with our insolvency team to run through your options. Good luck.