Dealing with a company’s insolvency is understandably one of the most complex and challenging scenarios directors can face. If handled poorly, it can have severe consequences for directors, including potential disqualification, personal claims, and even criminal prosecution. Too often, directors avoid taking advice from insolvency professionals early enough, thereby limiting the rescue opportunities available to the company and leaving themselves exposed personally.
Here, we suggest our top three tips for directors when your company is facing insolvency.
Tip 1 – Know Your Duties
Directors owe general duties to the company under the Companies Act 2006. It is important for directors to familiarise themselves with these duties to ensure they act in compliance with their statutory obligations. In addition, as directors of a company, you are also trustees of the company’s property and owe fiduciary duties to the company in that capacity.
But what about when a company starts to face financial stress?
Once a company begins to face financial stress, and directors know or ought to know that the company is insolvent or bordering on insolvency, the duty to promote the success of the company extends to acting in the interests of the company’s creditors. The greater the company’s financial difficulties, the more directors are required to prioritise the interests of creditors. Once there is no prospect of avoiding insolvent liquidation or administration, the creditors’ interests become paramount.
Directors can be found personally liable for losses suffered by the company or its creditors as a result of any breaches of those statutory and fiduciary duties, including the duty to creditors once engaged.
Our first top tip for directors when facing a company’s insolvency is to know and understand your duties and how to recognise the point at which the creditor duty is engaged. A good option is to take advice from an insolvency professional on your duties as directors so that you can be properly familiarised with them at the earliest opportunity.
Tip 2 – Stress and Distress: Know the Difference
All companies face stress. Some stresses can be external or macroeconomic, such as price increases on vital commodities or tax changes at national government level, which are completely out of a company’s control. Others can be internal and more discrete, such as key employees leaving the business or major equipment breakdowns that affect production or services. The question for directors is: at what point do those stresses start to lean towards company distress, at which point it is more than likely that the creditor duty is engaged and your focus should shift to prioritising the interests of the company’s creditors?
Our second top tip for directors when facing insolvency is to have a solid grasp of your company’s ability to weather a storm. Directors should know the point at which the company’s chance of recovery starts to look bleak and, once stress starts to become distress, seek advice from an insolvency professional.
Tip 3 – Plan Ahead and Take Advice
One of the biggest mistakes we find directors make when facing insolvency is burying their heads in the sand and not dealing with the company’s challenges early enough.
For example, if matters are dealt with at the earliest opportunity, administration may still be an option, which could see the company rescued or pre-packed to a new entity, allowing the directors to purchase the company’s assets and continue trading. Key employees could be saved, avoiding difficult redundancy talks and lost talent. It may even be possible to salvage the company’s relationship with its landlord and negotiate a new lease on existing premises.
Instead, directors often fall foul of fighting it out, continuing to try and solve the issues with great effort, and often find themselves in otherwise avoidable complicated situations. As the old adage goes, failing to prepare is preparing to fail, and this could not be more accurate when a company faces insolvency.
This delay can often be made worse when directors, realising the need for professional advice, continue to rely on advice from the company’s longstanding professionals, such as the company’s accountant or a financial advisor, instead of seeking advice from an insolvency professional. Whilst these advisors may have given sound advice in the company’s golden years, a proper grasp of the changing duties and responsibilities facing directors from the onset of insolvency is key to navigating the stormy waters and gives the strongest chance of ensuring the best possible outcome for the company and its directors.
Our third and most important top tip is to take advice from an insolvency professional at the earliest opportunity. The sooner directors take advice from an insolvency professional, the more tools remain available to the company and the better chance the directors have of achieving a satisfactory result for the company.
About MD Law
MD Law specialises in insolvency law and works with key insolvency professionals across the Yorkshire market. We are able to offer advice on directors’ duties and the onset of the creditor duty in the commercial context of your business. MD Law can help you plan ahead to take advantage of as many insolvency tools as are available to your business and, when the time is right, introduce you to a reputable and professional insolvency practitioner that is most suited to your needs.
For further advice and support, please contact us on 0114 299 4890, email info@mdlaw.co.uk or book your free consultation here.
