Coronavirus: Facing the threat of insolvency, being proactive as a director of a company!

Coronavirus continues to have serious financial implications for businesses and this week the wrongful trading provisions have been further suspended (for the third time) until 30 June 2021.

This does not represent a “get out of jail free card” for directors who should be conscious and aware of their general duties to creditors. This remains an uncertain time for many businesses, particularly in light of the regional differentiation between Tiers 1–3. It is therefore essential for you, as a director, to be highly vigilant in assessing the implications that coronavirus will have on your business and formulating coherent action plans to survive.

What is insolvency?

It is your duty, as a director, to act in the best interests of the company and its shareholders. Consequently, if your company is solvent with no financial concerns during the coronavirus pandemic, you will owe a somewhat limited duty to creditors, and shareholders continue to take precedence. However, when your company becomes insolvent or is on the verge of insolvency, your duty as a director changes.

Your company will be deemed to be insolvent if it cannot pay its debts when they fall due or the liabilities outweigh its assets. This will become clear from a review of the company’s accounts. At the point of insolvency, your responsibility as a director is increased; all the directors have equal responsibility and it is not sufficient to state that a fellow director deals with the accounts.

Therefore, it is highly important you consider the points outlined below and remain proactive.

Your duties as a director

When it is apparent the company has reached the point of insolvency, your duties as a director move to the company’s creditors as a whole. So, every action should be taken in the best interests of the creditors of the company. Allowing the company to incur liabilities when you know, or ought to know, that there is no realistic prospect of insolvency being avoided could lead to personal liability to compensate the company for such loss.

If you think the company cannot be saved, you must ensure that steps are taken to place the company into a formal insolvency process. The consequences of breaching your director’s duties can result in personal liability and/or disqualification as a director in the future, and lead in some cases to a criminal prosecution.

How to be proactive when your company is on the verge of insolvency

You should consider taking the following steps if your company is facing financial difficulties, to protect your own personal liability and creditors:

• When the board of directors become aware of potential financial difficulties, seek independent advice from a lawyer or licensed insolvency practitioner;
• When deciding whether continuing to trade is a realistic option, take advice from a licensed insolvency practitioner on your options and decide whether a recovery strategy or insolvency strategy is more appropriate;
• Ensure your actions comply with your duties, as you may be scrutinised at a later date by an office-holder if the company enters into a formal insolvency process;
• Only continue trading if it is the best course of action for creditors as a whole and take steps to minimise the loss to creditors;
• Keep a good line of communication with all creditors;
• Have regular board meetings to discuss the company’s financial position, keep details and accurate minutes which set out each step taken to improve the creditor’s position or ensure their interested are not prejudiced. Keeping minutes will assist the board should they be required to explain their decision-making at a later date;
• When repaying creditors, ensure payments are made only for the course of necessary trading and take advice on the priority of payments to creditors to ensure they are paid correctly;
• Check with lenders and other key stakeholders to ensure there has not been any breach of financial covenants. Where there has been, take immediate action and involve the company bankers at an early stage;
• Carefully monitor any demands for payment and legal proceedings served on the company. Make sure you immediately respond to them even if you are not in a position to pay and take legal advice at the earliest opportunity;
• Ensure that regular updated realistic budgets, forecasts and management and trading accounts are reviewed (ideally weekly);
• Take appropriate external advice from lawyers, accountants and other professionals on an ongoing basis;
• Ensure accounts are being properly kept up to date;
• Arrange regular meetings with your fellow directors and ensure there is an open and honest flow of information. If responsibilities are delegated, it is your duty to ensure appropriate arrangements are in place to keep the board up to date;
• Conduct a full review of the costs and expenditure of the company. Consider what non-essential expenditure can be reduced or avoided at an earlier stage;
• Check what insurance cover the company has, check these policy documents carefully and seek guidance from your broker if necessary; and
• If there is no reasonable prospect of avoiding insolvent liquidation, you should take immediate advice on instituting a formal insolvency procedure without delay.

It is imperative that these issues are dealt with early on as this can help avoid the necessity of a formal insolvency procedure. Choosing to ignore the company’s financial position will not only worsen the position of the company but can lead to personal liability. Therefore, you should ensure you consider your position carefully and receive the appropriate advice at the earliest opportunity.

For further information please contact Aman Sehgal using the below details.