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are the director responsible for company's debts with personal assets?

A company owes IR a large amount of PAYE over many months. The company has no assets. IR have indicated they don't accept payment spread over a few months by post-dated cheques and they insist that the director takes out a personal loan. If the company goes into liquidation, what do you think the position will be?

E.g. can IR start legal proceedings against the director to recover the debt from personal assets or make the director bankrupt in the absence of any assets? Where is the limited liability?

Any previous experience anybody or clarification of the legal position are welcome. Thank you.
jim

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By NeilW
04th Aug 2005 11:13

Limited Liabilty
It is important to realise that the limited liability of a company is there to protect shareholders in their capacity as shareholders. No third party shareholder in a company will ever be asked to contribute to the debts of the company should it go bust.

However directors are not so lucky. If they have been Wrongfully or Fraudulently trading on wind up then they can be asked to contribute personally to the debts of the company. Failing to cover PAYE debts would almost certainly be seen as negligent.

Moreover the Social Security Acts allow a director of a business to be charged with the unpaid employers NICs in certain circumstances (s121C of the Contributions and Benefits Act 1992).

An individual has always been potentially liable for any unpaid PAYE or employee NICs under the Social Security Regulations. Again in certain circumstances.

Limited Liability is not a get out panacea by which you can escape your debts.

Having said all that the Revenue's line is probably negotiable - particularly if you suggest to them that the individual will dclare personally bankrupt if they insist upon payment in full immediately.

NeilW

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04th Aug 2005 11:44

....wrongful or fraudulent trading...
....is certainly something that always needs grest care if a company is in finacial difficulties. The directors must take care for commercial as well as legal reasons, and not be reckless. But you should NOT be frightened into assuming directors have been reckless and wrongfully/fraudulently traded just because a company goes bust, even when no catastrophic event has not occurred, and that they are therefore personally liable for company debts.

In essence, the directors need to have objectively reasonable grounds for believing there are reasonable prospects of solvent trading. Whilst this should not be based on wild optimism for which there is no rational basis, it does not mean 100% certainty that all will come right.

If you have no experience in dealing with companies in financial difficulties, the directors should certainly be taking specialist advice if they are in any doubt as to whether the company will be able to pay its debts.

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04th Aug 2005 11:56

Get specialist advice

Jim

I would certainly recommend that the directors seek urgent advice from an insolvency practitioner.

If the company has no assets and owes a large amount of PAYE covering many months then it looks as if the company is insolvent and should no longer be trading. It also seems likely that the Revenue have not been treated fairly if others have been paid but they have not. (Particularly if salaries have been paid to the directors whilst Revenue liabilities were outstanding and overdue.)

There is a serious risk of the company going into liquidation. The liquidator will then be obliged to consider the conduct of the directors and report to the DTI.

This may result in proceedings leading to the directors' disqualification or even prosecution of the directors.

The directors may also find themselves personally liable to company creditors.

Get advice!

David

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By Anonymous
05th Aug 2005 10:14

Get the lawyers involved
I have just recently presided over an investment (we are a VC) whereby the Inland Revenue served a winding up petition regarding an aged debt for which there was a repayment schedule that was not being adhered to, so don't think that the Inland Revenue will negotiate if the business could be considered as a going concern. They can be tough.
Firstly you need to determine whether the company is trading whilst insolvent (and therefore the Directors are open to prosecution) or whether it is technically insolvent - where the company is still solvent in its day to day activities but that a large debt, if called, cannot be paid. If the latter then I strongly suggest you consider discussing with an insolvency practitioner or an insolvency expert in law to dtermine whether an administration or administrative receivership is the best course for the business.
One major consideration is whether there are any charges over the assets of the company from lenders or financiers as these will rank first in any winding up.
Get expert advice quickly.

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05th Aug 2005 10:54

The IR are not acting properly
The point is, though, that whether the directors are personally liable or not will be the decision of the receivers/liquidators and ultimately the courts, not the Inland Revenue debt collectors.

Going back to the original question, it appears the IR are telling the directors to get a personal loan to pay the debt, which to my mind, is presumptious.

In fact, if they did pay off the IR first, perhaps to the detriment of other creditors, then wouldn't the other creditors have a claim against preference given to the IR.

As others have said, professional advice from an insolvency practitioner is essential as all angles have to be considered.

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04th Aug 2005 09:51

Insolvent trading?
I would imagin that the directors have been trading whilct insolvent and are thus personally liable, unless some catastrophic event has suddenly made them insolvent, such as the bankrupcy of a major customer. Mor info needed but I think you need an insolvency specialist.

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03rd Aug 2005 15:53

directors/owners PAYE?
If the PAYE relates to directors/owners salaries, your client will be in difficulties -IR can chase for it personally. I came across this situation a couple of years ago, but can't quote chapter and verse, unfortunately.

However if it is in respect of unconnected employees, I am not aware of any legal rights the IR have to chase directors for the monies personally, and would be amazed if they did - be interested if anyone knows better.

They do of course have right to take legal proceedings against the company for the oustanding debt. Whether that would commercialy force the owners to borow, or go into bankruptcy is their decision!! I would go bacl to negotiate over the extended payments schedule ; unless there is something unsavoury in company's track record, or that of its owners/directors, I would be surprised if IR don't accept this. It is of course true they are being much tougher on this since their preferential rights under insolvency have been stripped away.

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