What are the Legal Responsibilities placed on Directors if Trading Whilst Knowingly Insolvent?
Directors of financially troubled companies need to take extra care in these uncertain times, especially regarding knowing what their responsibilities are and the serious consequences (including director disqualification and personal liability to creditors) for not carrying out these responsibilities when insolvency strikes. In this article our team looks at the key directors’ responsibilities and offers some practical and free company insolvency advice on the steps directors should take to ensure they carry out their responsibilities correctly.
The 4 Key Responsibilities of Directors
A company is legally insolvent if it either does not have assets to cover its liabilities, or it is unable to pay its debts as they fall due. If this is the case directors should be aware of the following responsibilities imposed on them by the Insolvency Act 1986 and must ensure they comply with them.
- Wrongful trading
Once directors know that there is no reasonable prospect that a company can avoid insolvent liquidation, they must do everything possible to minimise the potential loss to the company’s creditors.
If directors incur credit when they knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, they may be found personally liable for any credit incurred.
- Fraudulent Trading
This arises if business has been carried on with the intent to defraud creditors. For example if a debt was incurred when the directors knew that there was little prospect of the debt ever being paid or indeed where there was no prospect of it being paid within a reasonable time of it falling due.
- Preferences
Directors should ensure that they are not influenced by a desire to prefer one creditor over another.
- Transactions at an undervalue
Any transaction involving the disposal of a company’s assets must be at “arms length” and for full value.
It is important to stress that a director who knowingly breaches any of the above may be held to be personally liable to any creditor who suffers as a result.
Some Free Company Insolvency Advice – Practical steps for Directors to Minimise the Risk of not Complying With Their Responsibilities
Directors who believe that their company may be insolvent can take the following practical steps to minimise the risk of a wrongful trading action should the company fail to avoid insolvent liquidation:
- Regular board meetings should be held and minutes kept detailing all important commercial decisions.
- It is essential that the directors have up to date accounts and cash flow information readily available.
- Decisions taken should be in the interests of all
- If the directors believe that there is a prospect of the company avoiding insolvent liquidation, then they should seek the advice of a licensed insolvency practitioner ensuring at the same time that they do not take further credit from this point.
Seeking advice at an early stage will not only help directors avoid personal liability, it will also widen the options available, including the survival of the business through the use of rescue and turnaround techniques.
Talk to Us for Free Company Insolvency Advice
At Antony Batty & Company, we have four Licensed Insolvency Practitioners and a team of experienced insolvency supervisors and administrators who are available to give company insolvency advice at short notice. With offices in London, Brentwood, or Salisbury, we are well placed to cover the South of England and the Midlands.
Initial consultations are always free of charge. If directors are in any doubt about the solvency of their company they should contact us or call us on 0208 088 0633.
