The imminent insolvency of your company is a stressful time, capable of inducing grey hair and worry lines.
It also involves a strange shift in the obligations owed by a director.
Up to this point, where there has been no thought that the company may become insolvent, his obligation has been to promote the best interests of the company (Companies Act 2006, section 172).
However, when he forms the view that the company may become insolvent, he now has to think about the creditors and what is in their best interests.
This can be a very tricky decision for the director to make. Is the company experiencing severe cash flow difficulties? He may think there is a way to trade out of the problems. Is a balance sheet deficit only be a temporary issue? He might have an expectation that assets will soon exceed liabilities.
On that basis it may well be in the best interests of creditors that the company continues to trade. Or, it may not. Therein is the problem for the director.
In coming to its decision to trade on the director must show that his belief was reasonable, prudent and justifiable.
What steps should a director take when insolvency is near?
The following is a snap shot of a checklist for a director in the unhappy position of drawing the conclusion that his company is about to become insolvent:-
- Make sure your financial data is accurate and up to date;
- The Board must meet regularly and minute everything;
- Obtain and follow professional advice;
- Consider whether it is appropriate to cease trading, and obtain insolvency advice;
- Explore and record funding options;
- Obtain the support of key creditors;
- Manage cash flow and fully record decisions.
These are just the headline key points to consider. There will inevitably be more.