What do you do if your business is struggling to survive? I am often asked this by female directors of companies facing financial difficulties. When is a company’s financial position serious enough to warrant doing something about it? 

The danger is that if you are a director (or a manager acting as director without having been formally appointed), you can end up on the wrong end of court proceedings. You could be sued by the Liquidators or Administrators for wrongful trading or misfeasance (mis-applying money or breaching any duties owed to the company), or pursued by the Insolvency Service under the Company Directors’ Disqualification Act. 

In respect of wrongful trading the court will look at whether or not you knew, or ought to have known, that there was no reasonable prospect that the company would avoid going into insolvent Liquidation or entering Administration.

However, it is difficult to establish the exact moment when this happens. If you are aware of a problem, it is important to act swiftly to avoid the company’s financial position deteriorating further and creditors’ liabilities increasing. But there is also the risk that taking action prematurely may prevent the company trading out of a temporary financial problem. 

So what should you do if you find yourself in this situation? 

There are a few practical guidelines which will help: 

◗ Make sure that you have all the up to date financial data for the company at all times and that they are in regular communication with the company accountants. 

◗ Be vigilant that the company is keeping up with regular monthly payments that are due to creditors and keep abreast of unpaid debts due to the company. 

◗ Hold regular board meetings where minutes are taken. It is very important that directors work together, share information and make decisions together on commercial issues. If there are concerns these should be communicated to fellow board members and decisions made at board level. 

As soon as you become aware that there is a serious risk of pending insolvency then you should raise the problem with the rest of the board, and then take independent financial advice. 

You need to consider what Personal Guarantees you may be asked to give to the company’s creditors. If the company is seeking to refinance or enter into an invoice finance agreement with a bank where it has not done so before, then you should fully investigate your personal potential liability and the merits of increasing Guarantees where the company is in financial difficulties, as well as taking legal advice on your position. 

Disputes can arise between directors when the company is facing financial difficulties and in those circumstances a director may decide to resign and walk away, particularly if he or she is not a shareholder. If they do decide that this is the only option available, then these concerns need to be set out at a board meeting and documented in board minutes. Resignation will not necessarily protect a director from being pursued, in circumstances where he resigns shortly before the company is wound up or goes into Administration. 

When a company is nearing insolvency you have a common law duty to act in the best interests of their creditors. Failure to do so could leave you open to being sued and ordered to repay, restore or account for, cash or property that had been withdrawn from the company prior to insolvency. 

Since 2015 it has also been possible for the court to order a disqualified director to pay compensation following the company’s failure for the benefit of creditors. 

The risks are very real if you don’t act in the right way when a business is on the ropes. Make sure you know your responsibilities. 

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◗ Healys act for directors in connection with actions being pursued against them by Liquidators and Administrators, and also where they are facing disqualification proceedings. They provide advice on Personal Guarantees, shareholder disputes and other contentious matters. 

For further information or advice, please email Eleanor Richards on eleanor.richards@healys.com or direct dial 01273 810072