Directors’ actions if your company is suffering financial difficulties

25th June 2014  |   Category Blog , Insolvency and Bankruptcy

If you are a director of a company and you are concerned or worried that your company is suffering from bad debts or a lack of cash flow then you SHOULD take legal advice as soon as possible. If you do not then you face the very real risk that the company may go into liquidation or administration and the office holder may look at your actions and decide to take action against you to recoup some of the losses that the company suffered.

The following is a list of very simple things to DO and things NOT to do if you are in a situation where the company looks as if it is failing:

Things that you SHOULD be doing:

  1. Get professional advice in relation to major decisions taken by the company. All advice must be documented in order that you can rely on it should the company actually become insolvent.
  2. Consider and list all sources of possible funding available for the company. These decisions must be documented by the board. The list can be used by the board and others in being able to demonstrate the date at which the company no longer had any reasonable prospect of avoiding an insolvent position. The directors can use this list to try and avoid liability for wrongful trading.
  3. It is essential, as referred to above, that all discussions and meetings are documented accurately and precisely. It is important that this is done even if there are those that do not agree to the decisions made.
  4. Identify the crucial dates for financial continuance of the company. These dates are those that if they should fail to be met the company will in all likelihood have no chance of avoiding insolvency. It is essential for the directors and the company that these dates are strictly followed.
  5. Hold regular board meetings (and circulate the minutes immediately following the meeting). All directors need to be present as a complete understanding of the financial position is essential for the directors both in the short term and long term if the company should go into an insolvent position. The minutes need to be distributed so that there is evidence of the decisions made and whether or not the steps were actually taken.

Things that you should NOT be doing:

  1. You should not, unless you can argue that the extra liabilities are critical and in the interests of the business moving forward, allow the business to incur further (substantial) liabilities.
  2. You should not resign your position as a director. This will have no benefit to you if the company does go into insolvency. As a director you must take every step to reduce any potential loss to your company’s creditors.
  3. You should not allow the company to get to the stage of receiving a winding up petition or statutory demand to bring to your attention the company’s financial problems. You must ensure, as a director of the company, that you have up to date and accurate financial information at all time. You should also, as a company director, make sure that the company is compliant with all ongoing financial obligations.
  4. The company director should not ignore actions by creditors who are pressurizing the business for payment of outstanding sums. Further company directors should not ignore it if the company has judgments entered against it. The reasoning behind these behavioural actions are because they could be significant evidence of insolvency.
  5. Do not delay in raising a potential problem with your other board members. If you are aware or become aware that there is no reasonable prospect avoiding insolvency, or you simply fear it, then the director has an obligation to bring it to the attention of the rest of the board so it (the board) can take immediate advice.

 


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