It is very common for directors to seek advice from us when their Company is edging towards insolvency. At PBC we have many examples where that advice was taken, and consequently, our services were not required.
Equally, we see many cases where directors have not taken advice and creditors are pushing for action to be taken for dissipation of assets, wrongful or even fraudulent trading. For the purposes of this blog, I will not spend time discussing these as I want to focus on the practical steps a director should take if they are in this position.
The first point to mention is that once a Company is insolvent a director’s primary duty is owed to the Company’s creditors and not the Company or its shareholders. I often suggest that directors should take two important steps. The first is to hold and minute regular board meetings. These should be at least once a month and more regularly if the position has become critical. These minutes will not act as a defence for any wrongdoing but they may assist in providing the relevant authorities of your mindset at the time and should include the following:
- Provide details of the Company’s financial position and compare these to recent reports for signs of improvements or otherwise. It is obviously important the records are up to date.
- As ‘cash is king’, it is more important to review the cash flow position of the Company and identify the funding requirements for ongoing trading needs.
- A review the overheads to ensure all steps are being taken to service them.
- A review of sales for the future periods and confirm this is more than just ‘hope’ of work coming in.
- Summarise and document all major events, either good or bad since the last meeting. A new big order or a creditor taking legal action, for example.
- Finally, you should conclude the overall position and why it is in the interests of the Company to continue to trade.
The second step is to maintain copious notes. A bit old fashioned, I know, but I suggest keeping a day to day diary. This would be to document the major events as they happen on the days that they happen. The reasons for this can be demonstrated below.
A recent court action against directors for wrongful trading was Ralls Builders Limited. Further details of the case can be found here.
However, I can summarise the key details as follows:
- The judge commented that it was not a case of whether the company was insolvent but whether the directors knew, or ought to have concluded, that the Company had no reasonable prospect of avoiding insolvent liquidation. In this case, an investor had shown an interest in the Company, and this was evidenced.
- This was not to be judged with 20:20 vision.
- The directors had taken every reasonable step to minimise the potential loss to creditors.
- The directors avoided having a claim made against them personally.
The points this case show that the directors had the evidence to demonstrate and, to an extent, justify what they thought at the time (not with the benefit of hindsight) was happening and the steps they were taking were in the best interest of the creditors. Hopefully, this shows the relevance of the points highlighted above.
Obviously, it is important that directors take advice in these circumstances and in the above case the directors had indeed approached an Insolvency Practitioner and therefore were also able to show to the court that they had taken expert advice at the time, which is all you can ask a reasonably diligent person to do.
If you require any further information or help, please do not hesitate to contact one of our directors who offer initial interviews free of charge.