Directors’ duties in distressed scenarios: Navigating the storm
Our last article discussed how, as a director of a company, you have certain duties imposed on you by law, and those duties seek to protect the company you serve by regulating your behaviour and holding you to account for the way in which you run the company.
Ultimately, as a director, you are in a fiduciary position, in effect trustee of the company’s assets. Whilst the company is solvent, your primary duty is to promote the success of the company for the benefit of the members. However, in the realms of financial distress / insolvency, your duties shift and you are expected to take steps to try and limit the risk to creditors.
In the case of a company failure, the Insolvency Act 1986 empowers an administrator or liquidator, amongst other things, to investigate how the company was run. If your conduct falls below that which is expected, you may find yourself subject to claims for breach of duty. You may also be held personally liable to pay the company’s debts, in addition to fines, disqualification from acting as a director and not being able to act in future, and potential criminal liability.
Our last article talked about when your duty switches and when you should be putting creditor interests above shareholders. So, when that point is reached, what practical things should you consider?
- Keep an eye out for the warning signs of financial difficulty and seek appropriate professional advice at an early stage - and properly consider that advice and record the reasons for your subsequent decisions / actions with reference to it. Act on it early. The sooner you act the more options you’re likely to have. The later you address it, the more limited your choices are likely to be.
- Hold frequent board meetings and continuously assess the viability of your business, and keep carefully recorded minutes of all meetings. Monitor the financials, prepare regular (weekly, in some cases daily) management accounts, cash flows, trial balances and projections.
- Make sure your financial information is up to date – that way you can spot the warning signs early. Knowledge is power. If your financial information is a week or more out of date, then you’re constantly looking in the rear view mirror, which is no good. You need to be monitoring what is happening now and what’s coming up.
- Depending on your relationship with them, and what impact that may have commercially, consider whether to talk to your creditors and whether revised payment terms are viable.
- Take advice on whether to keep the company in business, when to call in administrators and when to cease trading and liquidate. Don’t necessarily rush to close the doors without considering matters properly, and the impact of doing so. In some cases (not always) closing the doors immediately can make the position worse, and a managed process can achieve a better result and outcome for creditors.
If you need any help understanding your position prior to and during insolvency, or you want to take early action to safeguard your position, please contact Frank Bouette or Ruvimbo Kandi, or you can give us a call on 0345 070 6000.
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