Director responsibilities generally
Until an insolvency appointment, the company remains under the control of its directors and is subject to normal company law, and the specific rules of the company as set out in its Articles of Association.
The Companies Act 2006 also sets out your obligations and duties to a company generally, as a director:
- promote the success of company
- exercise independent judgement
- exercise reasonable care, skill and diligence
- avoid conflicts of interest
- not to accept benefits from third parties
- declare any interest in a proposed transaction or arrangement
Director responsibilities on company insolvency
The advantage of a company with limited liability is that formal insolvency will unlikely affect the directors’ personal financial position, unless you have provided personal guarantees to any of the creditors. Accordingly, we can advise directors providing a personal guarantee in the course of refinancing, or set out your options if it is relied upon in the course of an insolvency. See our Business Advisory Services for more details.
A liquidator or administrator will have the right to examine transactions between the company and its directors, and to investigate and report on the conduct of the directors in the three-year period ending in formal insolvency. They will examine any directors’ loan accounts for recovery or claim purposes, and we can assist with any negotiations in respect of its recovery.
But whose responsibility is it to run the company – and more importantly how – in the period between recognising that the company is insolvent and an insolvency practitioner being appointed?
The hiatus period
Once the company has been formally assessed as insolvent, or you become aware that the company is insolvent (either unable to pay its debts as they fall due, or liabilities exceed assets) then your duties are to the company’s creditors. Your actions should be taken in the best interests of creditors with the aim of preserving any value in the business for the benefit of creditors.
During the hiatus period, the directors must not do anything to worsen the company’s financial position and this effectively means ensuring that no assets are reduced in value and no liabilities are increased. Bear in mind too that there is a distinction between the company and the directors’ personal circumstances.
You might need to decide if the company is continuing to trade, and how long it can continue is usually determined by cash reserves, creditor or intercompany support. If there is a prospect of selling the business as a going concern, the additional value which may be received on a sale must be balanced against the loss which is likely to be incurred in continuing the business during the hiatus period.
Before accepting delivery of any goods in the hiatus period, any goods which do arrive at the company’s premises should only be accepted on the basis that they are paid for immediately from cash belonging to the company. Any goods identified by a creditor as potentially reclaimable should be stored separately and clearly marked. If the directors allow the goods to be sold or used in the hiatus period they may be open to a claim for damages from the supplier.
The options
There may be several solutions available or there might just be one. It will depend on the financial circumstances of the company. The insolvency procedures are set out in law, and their benefit is that the creditors must accept the legal consequences of the solution.
The formal company insolvency options available are:
Restructuring options are as follows:
If you are looking for business advice, click here
The Bank
Depending on how the company’s financial arrangements are structured, the bank may be one of the most influential creditors. If the bank holds a floating charge, it can request the appointment of administrators to the company in certain circumstances. It is important that where a company is facing insolvency, you understand the bank’s options and how these can be exercised. We are happy to assist you with any bank negotiation in the course of business restructuring or exit.
Refinancing
We have excellent relationships with lenders, invoice financers and asset based lenders. If you client is exploring their refinancing or working capital options, we would be happy to introduce you, at no cost and with no fee payable to Dunedin Advisory.
We will help you assess your situation, explore your options, provide you with advice and develop a solution for you. To arrange a free, no obligation consultation click here or call 01592 630085.