Companies in trouble: Some dos and don'ts for directors
The directors of an insolvent company can be made personally liable not only for their own actions but also for the debts of the company.
The extent of that liability can be unlimited and can also lead to bankruptcy and/or disqualification from acting as a director in the future.
Directors in this situation must ensure that they act appropriately and often urgently. As an illustrative guide only, we have set out below some of the dos and don’ts.
Do:
• Do ensure you understand your responsibilities as a director. Directors’ duties and powers are wide ranging and can change dramatically once a company is insolvent. To be unaware of your duties and powers is not a defence.
• Do ensure that you understand all of the company’s contractual and financial documentation including debentures and other securities.
• Do ensure that you understand what insolvency means in relation to your company and when the company is legally insolvent. The legal position is not always obvious and can require in depth analysis.
• Do obtain professional advice in relation to decisions taken by the company.
• Do ensure that you hold regular board meetings, properly constituted in accordance with the articles of association.
• Do draw up a timetable by when financial milestones for the company must be met and consider, where appropriate, sources of new funding. This is a complex area of law and if you are at all unsure, you should take specialist advice.
• Do be fully aware of the points at which the company will fail to meet its obligations and where it cannot pay its debts when they fall due, now and in the future.
• Do keep your own written record of actions and reasons, discussions and meetings.
• Do remember that if your company’s shares or securities are listed or quoted on a share or stock exchange, you may have additional duties and liabilities.
• Do ensure that you pay proper regard to the company’s obligations to its staff, especially in restructuring and redundancy situations.
Don’t:
• Don’t let the company incur any new liabilities unless such liabilities will be paid. This applies to sometimes less obvious areas of funding such as revolving credit. If the company is or is likely to become insolvent, you must ensure that all actions are for the good of creditors.
• Don’t let the company take any action or enter a transaction which is unlawful or may be reversed at a later date, including by a liquidator or administrator. Examples include payments where creditors have been preferred above others and where assets have been disposed of at undervalue or new security has been granted.
• Don’t sit back and wait for court action or a winding-up petition to alert you to financial problems. Directors must have a full understanding of the financial position of the company. To bury your head in the sand may make things worse.
• Don’t delay. Make known any problems or concerns to the rest of the board and take action quickly. Make sure that all actions are based on specialist professional advice from a lawyer or insolvency practitioner.
• Don’t simply resign to try avoid the problem. Resignation can be viewed as deserting the sinking ship and can make things worse for all concerned.
• Don’t breach the terms of any directors’ and officers’ insurance policies. Check the terms and make sure you understand the extent of the cover and make a claim where appropriate. Again, if in doubt, obtain professional advice.
The law puts very strict obligations on directors of insolvent companies. The dos and don’ts in this article are for illustrative purposes only. Each case is different and specialist advice is required.
If you are the director of a company in difficulties, or that is or might be insolvent, feel free get in touch with us. Contact Andrew Tonge on ato@nexussolicitors.co.uk or on 0161 819 4900.
Any and all information on this website is general information and is not legal or other advice. Nexus Solicitors Limited is not responsible for any loss which may arise from relying on the information on this site.