Member Article

Advice for directors of companies in financial troubles

With Watson Burton LLP Law Firm

Latest statistics from the Insolvency Service suggest that company liquidations are actually on the decrease, not as you would expect given the talk of rising interest rates and the strength of the pound. It is still advisable however for directors to be aware of their duties when running a company which is in financial difficulties, as it is not inevitable that the huge increase in personal insolvencies will not have a concomitant effect on companies.

The most important thing for directors to remember is that in an insolvent situation they must act in the best interests of creditors, as well as the interests of the company. Directors cannot take decisions which benefit or return assets to shareholders in preference to creditors. It may be that the only option available is to cease trading, or alternatively it may be possible to trade through an insolvent situation because further funding may be secured in the near future. Directors need not panic into a winding-up of a company that with good advice can be saved, and the courts have protected directors who continue to trade in the reasonable belief that the company can be saved (Re Imperial Board Products Limited, The Official Receiver v. Huw Jones).

Case law suggests that directors are unlikely to be censured by the courts for their decisions as long as they are fully informed of the company’s situation, seek professional advice and regularly monitor and discuss the company’s financial performance, introducing financial controls where necessary. It is essential that regular board meetings are called and the minutes fully record the directors reasoning for commercial decisions.

This is not to say that a directors actions are not scrutinised carefully, bad decisions or ‘turning a blind eye’ in insolvent situations can leave a director open to actions for wrongful trading, fraudulent trading, misfeasance and ultimately disqualification and criminal sanction. If the rest of the board of directors cannot face up to the company’s financial difficulties a director may even need to resign his position.

Working with a insolvency lawyer or licensed insolvency practitioner can avail directors of the advice they need in insolvent situations to produce the best outcome for creditors and stakeholders and ultimately protect the director itself from action by a liquidator.

If you have any queries in relation to this article or any other insolvency law matter, please contact Paul Wigham at Watson Burton LLP on 0191 244 4444 or email paul.wigham@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .