Expert View
DIRECTORS HAVE DUTIES - FACE THE FACTS AND ACT
by Mark Hague Farleys associate partner
It is important to recognise the importance of early professional advice when a company faces financial problems, not only for the business but also for directors to avoid personal liability which can arise post insolvency.
If your company enters a form of insolvency process and at some time you knew or ought to have known that there was no reasonable prospect of the company avoiding formal insolvency, it could lead the court to order directors to contribute to the company’s assets as it sees fit.
A key defence for directors is ensuring that you have taken every step that could have been taken to minimise potential loss to creditors.
Do…
• Seek professional advice early • Produce an action plan to tackle the situation and a timetable for those steps to be taken
• Hold regular board meetings to monitor the financial situation and ensure all directors are aware and decisions are recorded in writing
business, owners must take immediate action to change the direction of travel or seek appropriate advice.”
She adds: “In addition to statutory responsibilities, directors have a responsibility to act in the interests of the company’s creditors, especially when insolvency is a possibility. It is their duty within law to do everything they can to make sure creditors get paid.
“We advise clients in this kind of position to break their business down into the relevant elements. If you are being put under pricing pressure, is there anything you can do to differentiate yourself from your competitors and provide value added services to continue charging at the same level or above?
“It might be that the business is completely market driven and unable to increase income, in which case there might be savings to be made in the cost base, despite costs still increasing.
“Typically, in a services business, the biggest cost is people. Here, businesses could look to operate with fewer people delivering the same services or delivering services in a different way – for example, using technology, remote working, or potentially saving premises costs.”
Nicola says decisions should be based on real time and accurate financial information and advises a 13-week rolling cash flow forecast tracking receipts, payments and pending costs
• Consider all possible funding sources and document efforts to obtain alternative sources of funding, if appropriate
• Consider the situation from the viewpoint of a ‘reasonable director’. No credit is given for over-optimistic directors who continue to trade even if they did so with the best of intentions
Don’t…
• Delay in discussing the challenges the company faces. As soon as you become aware that there is a reasonable prospect of insolvency, you have a duty to raise this and act
• Let the company incur any further liabilities
• Ignore signs of financial difficulties, such as creditor pressure, late filing of accounts, or wait for a winding-up petition before acting
• Continue to trade in hope that things will improve. Ask yourself whether you are acting in the manner of a ‘reasonable director’
• Resign - you have a duty to minimise potential loss to creditors and an abdication of responsibility can be seen as a sign of not acting in creditors’ best interests.
as a pre-requisite, “otherwise the business is flying blind”.
A forensic review of all processes that turn orders into cash will identify inefficiencies in cash retention and cash flow.
Other measures include reviewing the business’ inventory strategy, matching stock to orders and considering a ‘Just in time’ policy.
Nicola adds: “A communications plan should be prepared for each stakeholder group impacted by cash flow problems, from customers and investors to staff and suppliers.
“Economic recovery is understandably hailed as a welcome respite from economic problems, but it always brings challenges for businesses, most notably working capital and cash flow.
“Business owners should already be reviewing business plans and forecasts on a regular basis in order to take a long-term view of their position and continually improve.
“Despite the funding and equity options available to businesses, cash remains king. Cash is essential to repay debt and finance growth, but a shortage can precipitate failure and is often a problem that can be managed with early intervention.
“However, if it still doesn’t look great even after appropriately forecasting plans, owners must seek immediate advice.”
...but we believe the law should be
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LEGAL VIEW
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