Directors Responsibilities

"Are you aware of your fiduciary duties as a director?"

This is a question I ask every time I visit a distressed company director, and the answer I receive all too often is "no!".

Directors are aware however (in most cases), of their duties when business is bouyant and profits are being made, as the directors duty is simply, to act in the best interests of the company and it's shareholders/members.

When a company enters and remains in an insolvent position for an extended period, the company and the directors must, by law, acknowledge this and seek to reconcile the situation and/or seek advice from an insolvency professional.

The standard "healthcheck" in this situation is the three insolvency tests - the cashflow test, the balance sheet test and the legal action test.

Most companies I visit fail at least two of the tests. While the balance sheet test and the legal action test vary in their failure, failing the cashflow test (can the company pay its debts as they fall due) is almost always the reason the director seeks advice.

Section 123 (1)(2) of the insolvency act 1986 explains these three definitions in detail but, what many directors don't know, is that struggling on in an attempt to trade out of the financial crisis often increases the debt to the HMRC and trade creditors.

The directors fiduciary duties change in insolvency from acting in the best interests of the company and its shareholders/members to acting in the best interests of the creditors.

Wrongful trading (section 214 IA86) can occur at this time and can leave the directors liable for prosectution and the veil of incoporation being lifted. If the liquidator deems that the directors knew or ought to have known that the company could not avoid entering insolvent liquidation and increased the debts to it's creditors during this time whilst knowingly being unable to pay it back, the directors may be liable to make a financial contribution to the company's assets and sometimes much worse!

It is critical that directors are aware of these responsibilties and take advice early on in order to avoid this situation.

Liquidation is not the only option available. If advice is sought at the onset of insolvency, and the business is still viable, a company voluntary arrangement (CVA) can be proposed to the unsecured creditors, restructuring the historical debt and paying it back over up to a 5 year period thus giving the business a chance of survival .

If your business is experiencing financial difficulties or you are worried about any of the issues mentioned above, why not visit us at http://www.companyrescue.co.uk/  or call 0800 9700539 to arrange a free appointment with one of our regional advisors!