Misusing company assets is one of the most common reasons directors face investigation after insolvency. It happens when company money, property or resources are used for purposes other than legitimate business activities. It can have serious consequences, from personal liability to director’s disqualification.
If your company is struggling financially, it’s especially important to understand the line between acceptable use and misuse. Even decisions made with good intentions can be questioned if they reduce what’s available to creditors.
What counts as a company asset?
A company asset is anything owned or controlled by the business. That includes obvious things like money, stock and equipment. But it also extends to less tangible property such as intellectual property rights or goodwill.
Typical examples include:
- Cash in the business bank account
- Company vehicles, machinery and tools
- Computers, phones and office furniture
- Premises, stock and work in progress
- Contracts, databases and intellectual property
- The trading name or brand reputation
As a director, you have a legal duty to protect these assets and ensure they’re only used for the benefit of the company and its creditors, once insolvency is suspected.
Common forms of asset misuse
Misuse can take many forms. Some are deliberate, while others happen because directors misunderstand the rules that apply to limited companies. Typical examples include:
Using company funds for personal spending: Covering personal bills, holidays or non-business purchases from the company bank account.
Transferring assets below market value: Selling vehicles, equipment or property cheaply to yourself, family or another business.
Repaying connected parties ahead of others: Prioritising loans to yourself, relatives, shareholders or directors before other creditors.
Taking excessive drawings or dividends: Withdrawing money when there are no profits available, leaving the company short of cash.
Using company property for personal gain: Living in company-owned premises rent-free or using company vehicles for private use without proper accounting.
These actions can all be challenged by a liquidator or administrator if the company later enters insolvency.
Why it matters more during insolvency
When a company becomes insolvent, directors’ legal duties shift. Your priority moves from shareholders to creditors, meaning every decision must aim to protect their interests.
If the company is closed through Creditors’ Voluntary Liquidation (CVL), the appointed insolvency practitioner must review the company’s affairs. They’ll look closely at how assets were handled in the months leading up to insolvency. Any transactions that appear to disadvantage creditors could be reversed or lead to personal claims.
Under the Insolvency Act 1986, this review focuses on areas such as:
- Transactions at undervalue, where assets were sold for less than fair market value within two years of insolvency.
- Preference payments, where certain creditors were paid ahead of others, especially connected parties.
- Misfeasance (Section 212), where directors breached their fiduciary duties or misapplied company money or property.
What happens if misuse is found
If a liquidator or the Insolvency Service finds evidence of misuse, they can take several actions:
- Reverse the transaction, forcing the return of assets or funds to the liquidation estate.
- Seek personal repayment, making the director(s) liable for the loss.
- Director’s disqualification, banning them from running or forming any company for up to 15 years.
- Refer the case for prosecution, if there’s evidence of deliberate fraud or dishonesty.
Even if you didn’t intend wrongdoing, failing to act in the company’s best interests or ignoring advice can still be seen as misfeasance.
How to stay compliant as a director
The best defence against accusations of misuse is transparency and good record keeping. Practical steps include:
- Keep a clear separation between personal and business finances
- Record all director drawings and dividends correctly
- Get independent valuations before selling any company assets
- Avoid repaying yourself or connected parties ahead of others
- Seek professional advice before transferring assets or funds
- Keep minutes of major financial decisions to show your reasoning
If your company is close to insolvency, speak to a licensed insolvency practitioner before making any significant payments or sales. They can confirm whether your actions are compliant and help protect you from later challenges.
The difference between mistakes and misconduct
Not every error is treated as deliberate misconduct. Director conduct reports aim to establish whether directors acted reasonably given the circumstances. If you kept accurate records, sought advice and acted in good faith, that evidence can work in your favour.
Misuse becomes a problem when there’s evidence of negligence or concealment at creditors’ expense. The sooner you take advice, the easier it is to demonstrate that your actions were fair and transparent.
Key takeaways On misuse of company assets
- Company assets belong to the business, not its directors or shareholders
- Using them for personal or non-business purposes counts as misuse
- Misuse can trigger investigations under the Insolvency Act 1986
- Transactions at an undervalue, preferences and misfeasance are common risks
- Directors can face personal liability, disqualification or legal action
- Clear records, transparency and early professional advice are your best protection
Get advice on company asset misuse
If you’re unsure whether past payments or asset transfers could be questioned, it’s worth getting advice before things go further. A licensed insolvency practitioner can review the situation confidentially, explain your exposure and help you take corrective action where possible.
Don’t wait for an investigation to start. Contact us today for free, confidential advice on protecting yourself and dealing properly with company assets.
