The legal pitfalls to be aware of

Businesses fail for all sorts of reasons, some within the control of the entrepreneur behind them, others because of a variety of external factors. Most failures will end with at least some debts unpaid and with the company going into Liquidation, possibly after an attempt has been made first to rescue it through an Administration or a Company Voluntary Arrangement (CVA).

As is the way with entrepreneurs, one of their first thoughts will be to start up again, either to resurrect their business or start another one. Hopefully, they will have gone through the grief phase first, then accepted that they should not take the failure personally and, most important of all, worked out what went wrong and learnt from it.

Before they set off gung ho with excitement of a new start armed with a business plan and adequate finance, they need to make sure that the decks are clear from the closure of their previous enterprise. Unfortunately, formal insolvencies like Liquidation, Administration or a CVA bring with them the threat of sanctions against the directors, which can be a serious block on your new ambitions.

The insolvency practitioner handling your insolvency must submit a report to the authorities on their findings after investigating your conduct as a director. Their investigations can lead to prosecutions being launched in connection with a range of offences, such as Wrongful Trading, Fraudulent Trading, creating Preferences or in connection with Transactions at an Undervalue. The Wrongful Trading provisions have been suspended temporarily during the Covid-19 crisis, but will be re-instated eventually and must not be forgotten.

All of these can have serious personal implications for errant directors, including in some cases having to contribute towards creditors’ losses. The report itself could prompt action against a director to disqualify them from being a director or taking part in the management of any other company for a period up to fifteen years.

The problem is that the practitioner is banned from revealing the contents of their report to you and action against you may not be started for a considerable time after your company went into insolvency. There is no obvious way to find out whether your failure might come back to bite you, but a wise move would be to take advice from an insolvency specialist. They will know the questions to ask you, but be prepared to be totally open and honest about the events surrounding the failure.

One more legal hurdle faces the serial entrepreneur. What’s in a name, you might ask? Well, if your last company ended up in an insolvent Liquidation, no director can re-use its name for a successor venture (or any similar name that suggests an association with the failed company) without the consent of the court. If you ignore this requirement and the successor company fails, you could become personally liable for some or for all of its debts. Once again, you must take advice from an insolvency specialist on this point.

This might all seem like a legal minefield, but unfortunately business failure should never be without potential consequences for those who were directly involved. The trick is to know the risks and mitigate them as best you can. We have had a culture of forgiveness for business errors in the UK for almost twenty years, but it is not without boundaries.