What are a director's duties during insolvency?July 9, 2015
During normal, profitable times, you have a duty to act in the best interests of your company. However, when a company becomes insolvent, this duty switches to protecting the position of the company’s creditors and suppliers.
These are not always conflicting duties and it does not necessarily mean an insolvent company must immediately cease trading.
It is often a question of judgement and debate when exactly a company is insolvent, whether it should continue to trade and when a formal insolvency appointment should be contemplated. There are significant risks for directors personally so taking appropriate advice (either from an insolvency practitioner or a solicitor with insolvency experience) at an early stage is vitally important.
The sooner you recognise and acknowledge the warning signs that your company is beginning to struggle or is at risk of insolvency, the sooner you can seek appropriate advice and help.
Too often directors leave it too late to seek advice and help with the result. In cases like these,= insolvency practitioners areleft with limited or no options for saving the company or its business.
What should I do if my business is insolvent?
As soon as you think your company may be at risk you should:
- Take advice from an insolvency practitioner or solicitor as early as possible.
- Document the directors’ discussions and reasons for business decisions, including why continuing to trade, what changes are being put in place to turn the business around and what is being done to safeguard creditors’ interests.
- Do not continue to trade unless you have a reasonable belief that the company can be saved and returned to profit. This is a subjective decision and should be constantly kept under consideration. It is important that you recognise if and when it is no longer reasonable to think the company can be saved.
- Generally, you cannot pay one creditor in preference to others. For the avoidance of doubt, this means you cannot decide to pay back “valued long term suppliers” or family and friends who have lent the company money while not paying other creditors such as HMRC.
- You may have signed personal guarantees for bank facilities, loans or trade supplies. You must not choose to pay these back in preference to other creditors.
- If continuing to trade, it is probably best to pay up front for ongoing supplies to ensure those suppliers’ positions are not worsening by increasing the credit they have given you;
- If you need to sell business assets to raise funds, you must ensure you can objectively justify why they were sold and the price achieved. You need to be very careful if selling assets to a party connected to the business or where the full value is not achieved. Often directors can get themselves into serious personal problems in this area and taking independent professional insolvency advice in advance is essential.
Who should I contact?
If your business is insolvent, it's essential you contact a professional as soon as you can. At 180 Advisory Solutions, we never charge for an initial exploratory meeting with directors to discuss whether we can help so you have no reason not to contact out team today.