Directors' Responsibilities
Is the company insolvent?
The company is insolvent
if:
- it is unable to pay its debts as
they fall due, or;
- the value of its assets is less than the amount
of its liabilities, taking into account its contingent
and prospective liabilities
Responsibilities if the company is insolvent
The directors' primary duty is to avoid further
potential loss to the company's creditors.
Personal liability
of directors
If a director has failed to take "every
step" they
ought to have taken, with a view to minimising the potential
loss to the company's creditors, they could incur personal liability.
They may also be disqualified from acting as a director.
Steps
necessary once insolvency is identified
- Establish an up to date
financial position.
- Consider prospects for survival, taking care
not to be over optimistic or unduly pessimistic.
Where viability is not in doubt:
- keep full and proper minutes
of reasons for this conclusion and of decisions which are
believed to be in the best interests of
the company and its creditors;
- ensure that accurate and up to
date accounting information is always available and fully
understood;
- formulate and implement
a prioritised action plan to remedy the company's financial
difficulties;
- ensure that the company is
up to date with filing accounts at Companies House and
complying with all the statutory requirements;
- where a director disagrees with board policy
but elects to remain a director, ensure his or her views
are properly minuted.
Where viability is in doubt
- Seek the advice
of a licensed Insolvency practitioner immediately. An
initial consultation with The P&A Partnership is always
without charge. If we doubt viability, we will advise
the directors to:
- avoid taking further credit and pay cash for
future supplies;
- avoid paying any creditors unless it can be
justified (and minuted) as being in the best interests
of the company and general body
of creditors;
- avoid supplying customers who are also creditors
of the company;
- take appropriate action to stem losses, either
by ceasing to trade or by commencing formal insolvency
proceedings. There
are a number of formal insolvency proceedings that may enable the
business to survive.
Dealing with the dilemma
There will often be
situations where the directors identify insolvency and acknowledge
that viability is in doubt,
but believe that
there is a reasonable prospect of survival. In these
circumstances it may be inappropriate to commence formal insolvency
proceedings.
However, expert professional advice should
be sought to protect the interests of the company, its creditors
and
the directors
personally.
