Understanding Insolvency – Dos and Don’ts for Directors

Insolvency occurs when a company cannot pay its debts as they fall due, or when its liabilities exceed its assets. Directors have a legal duty to act in the best interests of the Company and its creditors, especially when insolvency is imminent.

Dos for Directors Facing Insolvency

1. Seek Professional Advice: Engage with an insolvency practitioner as soon as you suspect your company may be insolvent. They can provide insights and tailored guidance to help you navigate your situation.

2. Communicate Transparently: Keep open lines of communication with stakeholders, including employees, creditors, and shareholders. Being transparent helps build and maintain trust with stakeholders, which can facilitate better outcomes.

3. Review Financial Position: Conduct a thorough review of your company’s financial health. Understand your cash flow, debts, and potential liabilities to make informed decisions. Work with your trusted advisors, such as your accountant, to help with this where necessary.

4. Explore Options: Consider all possible alternatives to insolvency, such as restructuring, negotiating payment plans with creditors, or seeking additional financing. This is where seeking early advice from an Insolvency Practitioner can help; the earlier advice is sought, the more alternatives are likely to be available and an IP can discuss these with you.

5. Document Decisions: Keep detailed records of all decisions made and the reasoning behind them. This documentation can be crucial in demonstrating that you acted in the best interest of the Company and its creditors.

6. Act Quickly: Time is of the essence in insolvency situations. Delaying action can exacerbate the situation and may lead to personal liability for directors.

7. Prioritise Creditor Payments: If possible, prioritise payments to critical creditors and employees to maintain operations and goodwill. Seek advice from your trusted advisors, or an Insolvency Practitioner, if you are unsure as to what constitutes a ‘critical’ creditor.

8. Consider a Company Voluntary Arrangement (CVA): This can be a viable option for companies looking to restructure their debts while continuing to operate. Advice should be sought from an Insolvency Practitioner if you are considering this as an option.

Don’ts for Directors Facing Insolvency

1. Don’t Ignore Warning Signs: Ignoring financial difficulties will not make them disappear. Address issues proactively instead of hoping they will resolve themselves. The earlier you seek advice, the more options are there are likely to be available.

2. Don’t Continue Trading Recklessly: Trading while insolvent can lead to personal liability for debts incurred after the Company became insolvent. Always assess the risks before making any business decisions. If you are concerned about taking decisions, you can seek advice from your trusted advisors or Insolvency Practitioners.

3. Don’t Favor One Creditor Over Others: Preferential treatment of certain creditors can lead to accusations of misconduct. Aim to treat all creditors fairly. The exception to this is where making a payment to a creditor is necessary to maintain operations, in which case this can be classed as a ‘critical’ payment rather than a ‘preferential’ payment.

4. Don’t Hide Information: Concealing financial problems or misrepresenting the company’s position can lead to severe legal repercussions.

5. Don’t Make Rash Decisions: Avoid making hasty decisions in panic. Take the time to assess the situation and consult with Insolvency Practitioners where expertise is required; they are the liquidation experts.

6. Don’t Delay Action: Acting too late can limit your options and increase liabilities. Prompt action is crucial in insolvency scenarios.

7. Don’t Ignore Employee Rights: Employees have rights that must be respected during insolvency proceedings. Ensure compliance with employment laws and regulations.

8. Don’t Assume Personal Liability: While directors have protections, they can also be held personally liable under certain circumstances. Understand your legal responsibilities to mitigate risks. Always seek independent legal advice or consult an Insolvency Practitioner, if you are unsure as to your position with regards personal liability.

Conclusion

Facing insolvency is undoubtedly a difficult experience, but with professional guidance, directors can navigate the challenges it presents. . Adhering to the dos and don’ts outlined above will help you to protect yourself, your company, and your stakeholders during this critical time.

The key takeaway is that early intervention and transparency are key to achieving the best possible outcome.

FAQ’S

Q: Can I be personally liable for my company’s debts?

A: In the UK, a limited company is a separate legal entity from its directors and therefore generally speaking, a director cannot be held personally liable for a Company’s debts. There are, however, a number of exceptions. Click here for a full explanation.

Q: What is a Company Voluntary Arrangement (CVA)?

A: A Company Voluntary Arrangement (CVA) is a legally binding arrangement between a company and its creditors, that allows the Company to continue to trade under the control of its directors. The arrangement is ‘supervised’ by an Insolvency Practitioner. Click here for a full explanation.

Q: What are my duties if my company is insolvent?

A: When a company is insolvency a director’s duties change, and they must act in the best interests of the Company and its creditors. A full summary of a director’s duties can be found here.