Directors remain at risk
Although wrongful trading provisions have been adjusted to reduce directors’ exposure, directors remain at risk. This is because wrongful trading is only one of a number of pieces of legislation put in place to protect creditors.
Directors need to be very aware of their duties. When a company is insolvent the shareholders are ‘out of the money’ and it is creditors’ money that is being put at risk. Accordingly, when a company becomes insolvent the directors have a duty to put the interests of the creditors first. Further information about insolvency and directors’ duties can be found here.
Monitor for insolvency
It is a very tough time to be a company director. Cash flow is critical. Directors need to know how they are going to pay upcoming bills. If necessary, they should take steps to improve company cash flow (e.g. cost cutting, stock liquidation etc).
Ignorance of the company’s solvency position will not save directors from prosecution. Directors should regularly review the balance sheet position and cash flow projections. They should see their accountant or an Insolvency Practitioner if they need assistance with this.
What to do if insolvency becomes an issue
- Seek professional advice. Just because a company is insolvent it doesn’t necessarily mean the company must immediately cease trading but the earlier directors seek advice (ideally long before the company becomes insolvent) the better the chance of rescuing the business.
- Do not borrow money the company cannot afford to repay and do not take grants if the company does not meet the criteria. This would be to act in bad faith and is very likely to lead to prosecution. Some finance (e.g. overdraft, bounce back loans, supplier credit) may be available without providing evidence of ability to repay. Nonetheless, directors should prepare cash flow projections for their own records.
- If directors have doubts about whether the company can continue in business it might pay to discuss them with major creditors. Discussing payment terms builds trust which in turn increases the chances the creditor will try to help. Creditors may well request that the company exhausts other finance options before they will agree reschedule or increase credit. After all, creditors need to manage their own cash flow.
- An Insolvency Practitioner can help directors make decisions by setting out the options available to a company and the likely financial implications for creditors of each option.
- Ceasing trading is often the least favourable option from a creditor point of view. When creditors are presented with the figures that demonstrate this they may be more likely to grant breathing space to the company.
Keep records of all key decisions
- Under current circumstances no director can be expected to get every decision right. However, if the worst happens and a liquidator is appointed he has a duty to look back and decide if the director seems to have behaved reasonably. Directors shouldn’t expect the liquidator to take everything on trust. The onus is on directors to demonstrate why they made the decisions they did. They should make sure they have the records to show that all their decisions were driven by the best intentions.
- Directors have a duty to keep records. Failing to produce and retain records to justify their actions will not impress a liquidator or help a director to avoid liability.
- Records should include:
- who made decisions, when and based on what information;
- cash flow projections;
- the outcome of discussions with creditors and those agreeing to provide new, increased or rescheduled finance.
NOT LEGAL ADVICE. This information is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Silva Insolvency & Recovery Services Ltd professionals will be pleased to discuss resolutions to specific legal concerns you may have.