Balancing your director duties when financial difficulties arise
When financial difficulties strike a company the balance of a director’s fiduciary duties change.
In good times one of their core duties is to act in the best interests of the members. However when insolvency approaches, that switches to become a duty to act in the best interests of the company’s creditors. So how can directors balance that see-saw when financial difficulty strikes, but insolvency is not yet inevitable?
First off, remember that if you allow the company to continue trading when you know, or ought to know, that there is no reasonable prospect of avoiding liquidation / administration, you are at risk of personal liability the creditor position worsens as a result. Once that view is formed, it would be sensible to consider ceasing all payments and taking immediate steps to place the company into an insolvency process.
When financial difficulties strike, consider the following:
- Implementing more regular cash flow, and management accounts, reviews (which you should be doing regularly anyway), daily if needed. You need to monitor the position to identify that point in time (if it comes) when liquidation / administration becomes inevitable. It sounds simple, but so often it isn’t done.
- More regular board meetings / calls to monitor and review the position (they should be regular anyway), daily if needed. All relevant information (including financial information) should be circulated to the board in good time to allow them to properly review and consider it.
- Document the decisions reached at those meetings and the reasons why you consider that trading on is still viable. When reaching those decisions consider the impact on creditors as a whole – immediate and future. Perceived moral obligations need to be set aside, It is important to be decent but not to the extent you breach your duties. For example, are you paying a creditor because you feel you should without any real benefit to other creditors (present or future), or does paying one now ultimately benefit them all later (e.g. allows you to complete an order to collect money in and pay them off)?
- Do you need to tighten your credit control procedures, could you resolve cash flow by getting outstanding debts paid?
- Can you / do you need to stop all non-essential payments until you have the position under control?
- How will you control the flow of information: externally and internally? You may need to renegotiate terms with key suppliers, think about how you handle that so as not to spook them. Likewise, who needs to know internally? Also, while it may be tempting to impose a blanket of secrecy, will that inadvertently alert staff to a problem.. Consider whether you need to control the flow of information and spin it in a way that keeps staff carrying on with business as usual. Most situations spiral due to flows of information getting out of control. If you can control that, the battle is half won.
- Act and take professional advice early.The earlier you address the position, the sooner you can control and manage it. Trust me, the cost is worth it.
- Once you do get the position under control, learn from it. What could you do to avoid it arising again, or if you can’t – what could you do better to manage it next time? Use the experience to learn and improve.
For more information on ensuring you are balancing your director duties in the right way, please contact Frank Bouette, or you can give us a call om 0345 070 6000.