In a difficult financial market company directors should be aware that if their business is on the brink of insolvency they run the risk of personal liability for wrongful trading under section 214 and section 246ZB of the Insolvency Act 1986. To help, we have set out a list of some general do and don’ts.
• Do make sure you understand your legal responsibilities as a director.
• Do seek professional advice (in writing) dealing with any major decision taken by the company.
• Do hold regular board meetings with all directors present so the board is fully aware of the financial situation. Circulate all board minutes immediately after meetings to evidence the steps taken by the directors to minimise losses.
• Do prepare a list of all possible sources of funding for the company. By recording the board’s attitude to pursuing any source of funding you may be able to show at which point the company no longer had a reasonable prospect of avoiding insolvency.
• Do set out a timetable of financial milestones, such as new funding levels which must be met. This timetable should highlight the time at which the failure to meet a milestone means there is no reasonable prospect of the company avoiding insolvent liquidation/administration.
• Do keep personal written records of all discussions and meetings. If you disagree with a decision make a record.
• Don’t allow the business to incur any additional substantial liabilities until it is clear how they will be paid. Essential liabilities which are in the best interests of the company and creditors may be an exception.
• Don’t let the business take any action which may be a reviewable transaction. Preference and transactions at an undervalue can be set aside and directors can be disqualified (and ordered to pay compensation) for allowing them.
• Don’t wait for a winding-up petition. As a director you must have up to date financial information at all times.
• Don’t ignore your creditors, late filings of company accounts or court claims/judgments.
• Don’t delay before speaking to the rest of the board. If you fear there is no reasonable prospect of the business avoiding insolvent liquidation/administration you must raise it with the board so that immediate legal and financial advice may be taken.
• Don’t forget to check the existence and limits of any directors’/officers’ insurance policy.