The Duties of Directors: 4 Sins Directors of Insolvent Companies Must Avoid

A company is legally insolvent if does not have assets to cover its liabilities or it is unable to pay its debts as they fall due. Directors of an Insolvent Company, or one which may become insolvent, must avoid the  “four sins” as shown in the infographic below. They are key duties of directors that must be followed in order to avoid the threat of director disqualification or misfeasance. But first, how is insolvency defined?

Section 123 of the Insolvency Act 1986 defines that:

1.(a) “A company is unable to pay it’s debts if a creditor to whom the company is indebted in a sum exceeding £750 then due, has served on the company, by leaving at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum or secure compound for it to the reasonable satisfaction of the creditor or

(e) if it is proved to the satisfaction of the court that the company is unable to pay it’s debts as they fall due

2. A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

A debt is generally taken to mean an undisputed amount, which is properly due.

If your company is facing insolvency and you are uncertain what the duties of directors are, please contact us or call us on 0208 088 0633 for a FREE initial chat.

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