Dos and don’t for directors on the verge of Insolvency

Dos and don’ts for directors of a company on the brink of insolvency

Do’s

• Make sure that you fully understand your responsibilities as a director. Being a director of a company in financial difficulties can expose you to personal liability, for example for wrongful trading.

• Always obtain independent professional advice for all major decision you make.  Ensure that this advice is in writing.

• Regular board meetings are important. All directors should be in attendance, so that everyone is aware of the company’s financial position.

• Board minutes should be circulated immediately after meetings. The minutes will be your evidence of whether you have taken the to minimise the potential loss for the company’s creditors, for the purpose of avoiding liability for wrongful trading.

• Make a list of all possible sources of funding for the company. The attitude to pursuing any source of funding should also be written down and recorded. This will be useful in identifying the time at which the company no longer had any reasonable prospect of avoiding insolvent liquidation, for the purpose of avoiding liability for wrongful trading.

• Write down a timeline for when you expect the financial goals for new funding must be met. This should include and identify the time when the Company’s finances were such that those could not be met. To clarify when there was no reasonable prospect of the company avoiding Insolvency. It is imperative that this timeline is adhered to.

• Keep a written log of all discussions and meetings. This is especially important if you do not agree with a decision that has been made.

• There are more responsibilities and duties to be aware of if your company’s shares or securities are listed or quoted on a share or stock exchange. Liability may arise from legislation to ensure that markets are not mislead and relating to market abuse and place obligations on you and the company to disclose information, or to do so at a time when your instincts might otherwise suggest that disclosure is not beneficial.

Don’ts

• No new substantial liabilities should be incurred until it is clear how those are going to be paid. There are certain exceptions in cases where it is felt that these are necessary and will prove to be in the best interest of the company and its creditors.
  
  
• Any action which might be a reviewable transaction. This means that if the company later goes into insolvency, then there are transactions under the heading of Antecedent, which include, preferences, transactions at an undervalue misfeasance. These can be overturned by the appointed insolvency practitioner and the directors can be held responsible and even disqualified for allowing them (and disqualification can lead to a director being ordered to pay compensation).

• Wait for a winding-up petition to prompt you to take action. Directors must ensure that they always have up-to-date financial information and should closely monitor compliance with any financial covenants contained in arrangements with lenders.

• Ignore events like creditors putting pressure on the company, the company filing its accounts late or judgments being entered against the company. These could be evidence of insolvency, which a reasonable director should have known about.

• Delay raising a problem with the rest of the board. As soon as a director is aware there is no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, or fears that this is the case, he must raise the problem with the rest of the board so it can take immediate legal and financial advice.

• Just resign to avoid the problem. Directors must take every step to minimise potential loss to creditors. If they conclude that the company cannot continue to trade, they must implement one of the insolvency procedures, such as liquidation or administration.

• Forget to check the terms of your directors’ and officers’ insurance policy. Make sure you understand the extent of the cover and, if in doubt, obtain professional advice.

Next Steps

If you want to find out anything further about this topic then please feel free to call on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email vee@navigatebr.com

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.