There are various implications of Pre Pack solution for directors. They may or may not be involved in the new company and may retain personal lability for some debts of the old.
- Who can be a director of a Pre Pack company
- Directors liability for company debt after a Pre Pack
- What happens to Directors Loan Account?
- Is Director Conduct investigated?
Pre Pack Liquidation and Directors
Company Debt Expert James Falla discusses the affect of a Pre-pack administration on the company directors. For more company debt advice visit www.companydebtadvice.net
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Who can be a Director of a Pre Pack Company?
When a Pre Pack is used a new company will have to be set up. There is nothing to stop the directors of the old company becoming directors of this new business if they wish. In fact it is quite normal where it is the Directors who have initiated the process.
Having said that there is no requirement for the directors to continue in their roles. The directors of the new company may have had nothing to do with the old. If the old company owes money to HMRC appointing new directors can be an advantage. It will then be less likely that a VAT deposit will be required.
If the company directors are not involved in setting up the new company under TUPE law they must be offered positions in the new business. If they do not wish to take these up they can choose to resign or be made redundant.
Directors liabity for Company Debts after a Pre Pack
As part of the Pre Pack process the old company will be closed. Any company debts that are left unpaid will normally then have to be written off. There is no obligation on the company directors to pay these.
The exception to this rule is if any of the directors has given a personal guarantee. Once the company is liquidated the creditor will ask any director who has given such a guarantee to pay the balance outstanding.
A Personal Guarantee is a signed agreement that an individual will pay an outstanding debt if a company is unable to do so.
If the guaranteed debt is a bank overdraft or loan the director will often be allowed to turn it into a personal loan. This can then be repaid in sensible monthly instalments. However if the director refuses to cooperate the creditor can enforce payment with court action if necessary.
What happens to Directors Loan Accounts if you do a Pre Pack
It may be that a director of the old company took money in the form of dividends which the company was not in a position to pay. This is often the case if cash was drawn when the company was not profitable. These drawings are accounted for as director’s loans.
If there are outstanding directors loans when the old company is liquidated the director who took these is personally liable to repay the debt. Directors need to be prepared for these personal liabilities. A plan must be in place for how they will be paid before the Pre Pack solution is started.
Generally speaking the liquidator of the old company will be open to agreeing a sensible debt repayment plan. However if this is not possible the director might have to consider using a personal debt solution such as an Individual Voluntary Arrangement (IVA).
Is Director Conduct investigated in a Pre Pack?
Once the old company is closed one of the roles of the liquidator is to investigate the conduct of the directors of the company. This includes anyone who has been a director in the last three years. It also includes anyone who has acted in the capacity of a director.
The liquidator must submit a report about the conduct of each director to the Insolvency Service. If they believe that a director has wilfully allowed the company to trade while insolvent (wrongful trading) they will recommend a further investigation.
This situation does not usually occur. It will normally be the directors themselves who recommend the liquidator. They are not likely to do so if advised that wrongful trading will be an issue. Having said that if it does happen the Insolvency Service may choose to investigate further. If the claim is upheld the Director could be disqualified and even be held liable for some of the company’s debts.