Directors do not have a duty to ensure that the company does not trade at a loss but they are at risk of personal liability or subsequent disqualification from acting as a director if they allow the company to trade whilst insolvent. Once a company is insolvent the directors owe a duty to take care to protect the interests of its creditors above the interests of its members. The duty is owed to the company (to take care to protect the interests of its creditors). The duty is enforceable in the name of the company by a liquidator, administrator or administrative receiver and means that the directors cannot assume that any shareholder ratification or sanction for actions damaging the interests of creditors will relieve them of liability.
In addition to the general duty to creditors when a company is insolvent there are two other areas of concern for the directors of companies in financial difficulties. These are fraudulent trading and wrongful trading. These are dynamic areas of law and if you are trading whilst insolvent, or where the company has no realistic prospect of avoiding insolvent liquidation or administration the directors should be taking urgent advice (both legal and financial).
In order to assess properly the various alternatives open to the Company, all the directors should ensure that they have access to proper financial and legal advice. It may be essential to involve auditors or independent financial advisers in discussions on the financial position of the company. In addition, a team may need to be assembled to deal with discussions with the company’s bankers and other lenders. The Company may have existing advisers who should be involved in this and the formulation of a strategy to avoid insolvency. The Company’s lawyers should be involved in order to consider whether any proposed transaction could be vulnerable as a preference or for some other reason. It may be appropriate for the Company to retain an Insolvency Practitioner to advise the Company on the alternative strategies. HCR can advise on all elements.
The directors may wish to take advice individually in view of the personal risks involved in management of a company approaching insolvency.
The directors should be able to regularly assess the company’s financial position by way of the preparation of regular balance sheets, cash flow projections and other current financial information.
All directors should be kept informed of the financial position and prospects for the company.
In assessing the prospects of the company avoiding insolvent liquidation or administration, the directors will be relying upon a strategy for restoring the company to a healthy financial position and avoiding a formal insolvency proceeding. Formulating a viable strategy to avoid an insolvency process is key.