When a company enters administration, it can be an overwhelming and uncertain time for directors. Understanding exactly what company administration is, as well as your responsibilities, rights, and risks, is crucial to navigating the process correctly and protecting your position. Below are seven key things every director should know about company administration.
What Company Administration Actually Means
Administration is a formal insolvency procedure designed to protect a company from creditor action while a licensed insolvency practitioner assesses the best way forward. The goal of the administration process is to rescue the company as a going concern or achieve a better result for creditors than liquidation, depending on which will realistically provide the best outcome for the company’s creditors. Once company administration begins, control shifts from the directors to the administrator.
What Happens To Directors When A Company Goes Into Administration?
Directors do not automatically lose their title when a company enters administration, but their powers are significantly reduced for the duration of the administration process. The administrator takes full control of the company’s affairs, and directors must give their full cooperation to help the administrator fulfil their role. You may be asked to assist with providing information, retrieving records, and making decisions for the company. Additionally, your conduct leading up to insolvency may be scrutinised to ensure no wrongdoing on your part.
It’s Your Duty To Cooperate With The Administrator
As mentioned, directors have a legal obligation to fully cooperate with the appointed administrator during the company administration process. These duties can take a lot of different forms, but some of the more common ones include:
- Providing the administrator with detailed company records and financial information
- Explaining any transactions and decisions made by the company under your directorship
- Assisting in asset identification
- Attending meetings if you are called in
Failure to cooperate can lead to severe legal consequences, including court action.
You May Be At Risk Of Personal Liability
One of the biggest concerns for directors facing company administration is whether they can be held personally liable. In normal circumstances, directors do not have any personal responsibility for the failure of the company and are not expected to repay any money to creditors out of their own pocket – the company as its own entity is liable. However, there are circumstances where this is not the case, and a director can be found liable.
If you signed a personal guarantee accepting liability in the past, then you will certainly be held liable. If you continued trading while knowingly insolvent (known as wrongful trading) or misused company funds or assets, then these are grounds for personal liability too. However, if you acted responsibly and sought advice early, your risk may be significantly reduced.
Investigation Into Director Conduct
The administrator is required to review the conduct of directors in the period leading up to insolvency. If you’re found guilty of misconduct as a director of a company, you could face a report to authorities, potential disqualification proceedings and legal claims against you for personal liability. Maintaining accurate records and acting transparently throughout your tenure as director is critical.
Can A Director Resign From A Company In Administration?
Yes, a director can resign while the company is in administration, but it is rarely a simple or risk-free decision. There are a number of significant factors to take into consideration before making that decision:
- Resigning does not remove any liability for your past actions as a company director.
- You are still required to fully cooperate with the administrator during the company administration process, even after resignation.
- It may raise concerns or suspicions if done at a sensitive time.
- In some cases, staying involved can demonstrate responsible conduct and help re-secure creditor trust.
It’s strongly advisable to seek professional advice before you come to any kind of decision regarding resigning during company administration.
Impact Of Company Administration On Your Future As A Director
Being involved in a company that enters administration does not automatically prevent you from acting as a director in the future. There is nothing stopping you from moving on to another endeavour and holding a directorship in another company, as long as you have not been barred as a consequence for misconduct. However, you should keep in mind that your reputation may be affected, and future lenders or partners may be hesitant to work with you.
Company administration is not the end of the road, but it is a serious process with significant responsibilities for directors. The key is to act early, remain transparent, and seek professional guidance throughout. If you’re looking for a licensed insolvency practitioner for legal advice or to carry out your own company administration, you can get in touch with us today for help.
