Financial problems and director duties

It is important to recognise the importance of early professional advice when a company faces financial problems, not only for the business but also for directors to avoid personal liability which can arise post insolvency.

If your company enters a form of insolvency process and at some time you knew or ought to have known that there was no reasonable prospect of the company avoiding formal insolvency, it could lead the court to order directors to contribute to the company’s assets as it sees fit.

A key defence for directors is ensuring that you have taken every step that could have been taken to minimise potential loss to creditors.

Do…

  • Seek professional advice early
  • Produce an action plan to tackle the situation and a timetable for those steps to be taken
  • Hold regular board meetings to monitor the financial situation and ensure all directors are aware and decisions are recorded in writing
  • Consider all possible funding sources and document efforts to obtain alternative sources of funding, if appropriate
  • Consider the situation from the viewpoint of a ‘reasonable director’. No credit is given for over-optimistic directors who continue to trade even if they did so with the best of intentions

Don’t…

  • Delay in discussing the challenges the company faces. As soon as you become aware that there is a reasonable prospect of insolvency, you have a duty to raise this and act
  • Let the company incur any further liabilities
  • Ignore signs of financial difficulties, such as creditor pressure, late filing of accounts, or wait for a winding-up petition before acting
  • Continue to trade in hope that things will improve. Ask yourself whether you are acting in the manner of a ‘reasonable director’
  • Resign - you have a duty to minimise potential loss to creditors and an abdication of responsibility can be seen as a sign of not acting in creditors’ best interests.