Michael Healy and Angus Robertson of Leonard Curtis Business Solutions Group explain some steps which directors of companies in financial difficulties can take when approaching the problems their company is experiencing and which can also help to protect a director’s personal position.
The economy is in dire straits, businesses are going to the wall, there does not appear to be much hope of an early recovery and consequently individuals and businesses are struggling to cope. The reality for some companies and their directors is that they really cannot take any more. With mounting debts, customers disappearing and, in many cases, HMRC breathing down their necks, it’s little wonder that many companies feel beleaguered and lack any optimism.
The directors of a company experiencing such difficulties need a clear plan of action. This achieves two principal aims. First to try to form a clear and realistic assessment of the future prospects of the company. Second to ensure that the directors act properly in accordance with their various duties and thereby reduce, and ideally eliminate, the prospect of them incurring any personal liability in relation to the company’s affairs. So what should any sensible action plan include?
The first point to make is that, in itself, having a plan of action is some protection against personal liability. The overriding theme behind the various duties owed by directors of companies is that they must act sensibly and prudently. Without a plan of action based upon a realistic assessment of the company’s position, and ongoing reviews as to whether or not the plan is being achieved, it is difficult for a director to convince the outside world that they have acted sensibly and prudently. Beyond having a plan of action (and as part of putting one in place) the directors should also consider the seven points listed below.
Desertion may be the most dangerous route
On occasion, and perhaps understandably, directors reach a stage when they believe that walking away from the difficulties might be best. Unfortunately potential liability does not end simply because a director resigns from their office as director. If a company is insolvent, or insolvency is a realistic prospect, a director’s primary duties move from being duties to act in the best interests of the shareholders of the company to duties to act in the best interests of its creditors as a whole. So unless the director can demonstrate that resignation was the best interests of creditors - perhaps because it forced the remainder of the board of directors to focus upon financial difficulties of the company which they had previously ignored - simply resigning will not satisfy the duty relating to creditors.
Secure the information flow
Ensuring that the directors have access to proper and current information about the company’s financial position and that this is then properly assessed and appropriate action taken in light of this is vital. Proper information includes:
- current and predicted cash flows;
- profits and losses; and
- debtor and creditor positions.
Evidencing proper assessment of the company’s position
Holding regular board meetings at which proper minutes are taken of the topics discussed can be vital. This demonstrates a responsible attitude to the company’s financial difficulties and should stimulate proper discussion about the realistic prospects for the company, the difficulties it faces and how these might be approached.
When combined with securing the information flow, this may be particularly important in relation to any allegation of wrongful trading. Where a company goes into insolvent liquidation the liquidator can apply to court if he or she believes that at some time before that point a director or former director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid insolvent liquidation (and was a director of the company at that time). In such a situation the liquidator can ask the court for an order that the relevant director or former director makes a contribution to the assets of the company from their personal assets.
To avoid a wrongful trading order a director will need to show that there were reasonable prospects that the company would avoid insolvent liquidation or that once this was no longer the case appropriate steps were taken. Appropriate steps include ceasing to trade, ceasing to incur credit and taking professional advice from an expert such as an insolvency practitioner or insolvency solicitor.
If, as a director, you do not agree with the decisions being made at board meetings you should ensure that your dissent is recorded in the board minutes. If your fellow directors refuse to allow this, you should make your own independent notes of the discussions and of your objections so that you have a clear record to which, if necessary, you can refer at a later date.
Understand your environment
The directors should only cause the company to act in ways which are consistent with the constraints which apply to it. For example if a cost-cutting exercise is felt to be desirable it must be considered carefully before being carried out. Cutting the cost of the workforce may be a necessary, though regrettable, way forward. However, if what is intended as a redundancy exercise in fact creates the opportunity for unfair dismissal claims, the desired cost reduction may in fact become a cost increase.
Focus on the main stakeholders
As referred to above, where a company is insolvent, or insolvency is a realistic prospect, a director’s primary duty is to act in the best interests of the company’s creditors as a whole. Having said this, it may be important to focus upon certain stakeholders (who may also be creditors). The company’s bank or other financier would be one prime example. If the company is unable to comply with the requirements of its facilities it may find that its line of credit is removed or restricted. Directors therefore should keep the company’s financiers fully and clearly informed of the company’s financial position and requirements - financiers do not like surprises.
The directors should also consider the other important stakeholders such as the workforce (whether employees or other forms of worker), the landlord (if premises are leased by the company) and key suppliers and customers.
Treat everyone equally
Paying certain creditors because you wish to see them paid but not paying others can cause problems. If the company subsequently goes into liquidation or administration such payments can be challenged. For example paying debts of the company, which a director has personally guaranteed, in order to try to avoid the director being pursued under that personal guarantee can be challenged.
Also subject to challenge are transfers of assets for less than their true value. So think carefully before entering into any such arrangements and ensure the current values of any assets to be transferred are known.
Take proper advice
Consider very carefully whether professional advice should be taken, whether from insolvency or turnaround experts, lawyers, accountants, company doctors or others. This can provide very helpful guidance about the possible steps which might be taken and can also demonstrate that a responsible attitude was taken by the director in relation to the company’s difficulties.
Leonard Curtis Business Solutions Group (LCBSG) is one of the UK's leading refinancing, debt restructuring, turnaround and recovery firms. Keystone Law and LCBSG regularly work together in relation to companies and other businesses which require restructuring and turnaround advice to try to provide clear practical solutions for the problems they are experiencing.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.