The Government’s statistics for company insolvencies in the period July 2023 to September 2023 showed that in the second and third quarter they were at the highest level since the second quarter of 2009, and the uptick appears to continue.
Directors of companies facing financial trouble need to be aware that if they are found to have allowed the company to wrongfully trade they could face personal liability for the debts incurred whilst doing so.
To protect the company, its creditors and themselves they need to seek and follow professional advice. Set out below are some of the common “dos and don’ts” that should be considered.
What to do
- If unsure what your responsibilities are as a director take advice to ensure that you are clear about what they are, what is expected of you, and what the consequences might be if you fall short.
- Take professional advice on any major decisions that you are contemplating and get the advice in writing.
- Ensure that the company is complying with the financial covenants it has with its lenders.
- Notify your fellow directors of your concerns and arrange to hold regular board meetings. All directors should attend so that they are all aware of the financial status of the company. If you are a sole director set aside time to review the finances and document the reasons for any decisions.
- Board meetings should discuss financial concerns and have up to date financial information available for consideration.
- Board meetings should be carefully minuted and circulated for approval. These can be vital to directors accused of wrongful trading as they may be used to evidence the steps taken to minimise the potential loss to creditors.
- Investigate and document possible sources of funding and the reasons why they were, or were not pursued. Again, this might evidence the steps taken to minimise the potential loss to creditors if the directors are accused of wrongful trading.
- Document benchmarks for financial performance, this will show whether or not financial plans and projections are accurate. It will allow appropriate decisions to be made.
- Consider keeping a personal journal to record discussions and meetings.
- Obtain professional advice from key advisors such as lawyers, accountants and insolvency practitioners at an early stage when more options are available.
Do not!
- Ignore professional advice.
- Ignore warning signs. Creditor pressure from missed payments, the threat of legal proceedings, court judgments and late filings cannot be ignored.
- Allow the company to incur any new substantial liabilities. Any new liabilities that are incurred should only be incurred if there is a clear and considered plan as to how they will be repaid, and that incurring them is essential and in the best interest of the company and its creditors.
- Do anything that might result in there being a “reviewable transaction” such as a preference or transaction at an undervalue in the event that the company goes into administration or liquidation.
- Wait for creditors to issue proceedings, or worse still winding up petitions before taking the threats seriously.
- Delay in admitting there is an issue. If there is an issue it needs to be dealt with and the other directors need to know your concerns.
- Resign in the vague hope that you will be able to avoid the issue. As a director to avoid being found guilty of wrongfully trading you must take every step to minimise potential loss to creditors. If the company has reached the point of no return urgent advice needs to be sought which may include placing the company into a formal insolvency procedure.
- Forget to obtain and follow professional advice!
The above is not intended to be taken to be advice and is for general guidance only. Detailed advice should always be sought as no two situations are ever the same.
Cognitive Law have specialists who can give advice on matters relating to Director’s liabilities, should you wish to discuss any issues arising from the above please contact Darren Stone on darren.stone@cognitivelaw.co.uk or call on 01273 284055.