Dos and Don’ts for Directors of companies in financial difficulties to avoid the risk of liability for wrongful trading under section 214 of the Insolvency Act 1986
We are often asked what to do when insolvency becomes an issue. This is a case where expert advice is best and can often prove invaluable. With this in mind we approached Caroline Buchan, a respected Direct Access Barrister and asked her to provide some down to earth guidance.
- Obtain professional advice and insist on any such advice being documented
- Hold regular board meetings: All directors should be present so the whole board is aware of the company’s financial status
- Circulate the board minutes immediately after meetings: as these are evidence of the steps taken by the directors reduce the potential loss for the company’s creditors, which will assist in minimising liability for wrongful trading
- Keep your own written record of all discussions and meetings: This is especially important if a director disagrees with a decision that has been made and wants to rely on his/her objection as evidence later on
- Draw up a list of all possible sources of funding for the company: Document the board’s attitude to pursuing alternative sources of funding. This will help to identifying the time at which the company no longer had any reasonable prospect of avoiding insolvent liquidation, to assist in avoiding liability for wrongful trading
- Draw up a timetable by when financial markers such as new funding levels for the company must be met: This strict timetable should identify when the company failed to meet a marker which will show there is no reasonable prospect of the company avoiding insolvent liquidation.
- Let the company incur any new substantial liabilities until additional funding is secured: except if the board considers such liabilities to be necessary and in the best interests of the company
- Ignore events like creditors putting pressure on the company, the company filing financial statements or accounts late or judgments being entered against the company as these are clear evidence of problems or insolvency, which a reasonable director should have known about
- Wait for a winding-up petition to alert you to financial problems: Directors must ensure that they have up-to-date financial information at all times and should closely monitor compliance with any financial covenants contained in arrangements with lenders
- Delay raising a problem with the rest of the board: As soon as a director becomes aware that there is no reasonable prospect of the company avoiding insolvent liquidation, or believes that this will be the case, he/she must immediately inform the remainder of the board to enable it to take immediate legal and financial advice
- Just resign to avoid the problem: Directors must take every step to minimise potential loss to creditors. If they conclude that the company cannot continue to trade, they must implement one of the insolvency procedures, such as liquidation or administration. By resigning a director cannot avoid being held responsible if he/she was in office at the material times or involved in poor decision-making
- Forget to check the terms of your directors’ and officers’ insurance policy: Make sure you understand the extent of the cover and, if in doubt, obtain professional advice.