Directors of companies facing insolvency

Covid 19 has led to many businesses entering 2021 with the uncertainty as to whether they will survive. Despite the introduction by the government of a number of temporary and permanent measures to support UK businesses and companies, it is important for directors to objectively assess whether their business remains viable, now or in the future. Obtaining professional advice early, from solicitors, insolvency practitioners and/or accountants, may be critical to the business surviving.

A company will be deemed to be insolvent if it cannot pay its debts when they fall due, or the liabilities outweigh its assets. At the point of insolvency, a director’s duties shift from being to the shareholders/ members, to the company’s creditors.

Wrongful trading provisions have been suspended until 30^th April 2020, however directors must remain alert to their duties to creditors. Directors should act quickly when insolvency becomes apparent, to ensure they are acting in the best interests of the company’s creditors as a whole and to protect themselves from personal liability. When directors become aware of the company having financial difficulties, it is vital that they seek professional advice promptly.

Considerations for directors of a company in distress:

1. Ensure you continue to fully comply with your duties as a director of a limited company, under sections 171 – 177 Companies Act 2006.

2. If possible, make informal arrangements with your creditors to pay all liabilities in a fair and even way. Ensure that any such arrangement is recorded in written correspondence.

3. Do not be tempted to repay debts owed to associated or connected businesses first, or to pay those creditors putting the most pressure on you first. It is your duty to have regard to the interests of the company’s creditors as a whole and not prefer one above others.

4. Ensure you refrain from selling company assets at a reduced price in an attempt to raise funds fast to repay company debts. There is a requirement for company directors to maximise the return to creditors in insolvency and the sale or transfer of assets at an undervalue could be construed as wrongful or fraudulent trading if later investigated. This could result in the creditors receiving less of the money they are owed if the company enters liquidation. The Court can reverse such transactions and severe penalties can be imposed on directors.

5. Be proactive in collecting in your debts. Aged and overdue debts are the most difficult to collect. Seek to agree repayment plans with debtors, recording any agreement made in writing.

6. Check any agreements you have with your bank and other funders. Ensure you know what powers the bank has over the business and assets. Check what security the bank holds. This could include an “all assets debenture” over the company’s property, stock, work in progress and invoices; a legal charge over land or property owned by the company or over property personally owned by directors. Also check the terms of any hire purchase agreements to understand the rights of the finance company with regards to the asset.

7. As a director you may have given a personal guarantee to the company’s bank, funders or suppliers, to repay the sums owed if the company cannot. This provides additional security to them. Ensure you review documents relating to this to establish the extent of your liability.

8. Check your terms of business and those of your customers where you are trading on their terms. In the event of a dispute arising, it is important that you know what you have contracted to do and what your rights are under the contract and those of your suppliers and customers.

9. If your company trades from rented premises, review the lease to establish if it is in the name of the company or the director personally. If it is in the name of the director as an individual, as the named tenant, you will be responsible for paying the rent.

10. Ensure you seek professional advice promptly. Seeking legal advice early will allow you to fully understanding your legal position and all your options. This will assist in making a clear plan of action in order to avoid any additional or unnecessary problems and will save costs in the long term.

If you are a director of a company facing financial difficulties, or require any insolvency advice, please do not hesitate to contact our Insolvency team.