Directors’ Responsibilities When a Company Becomes Insolvent

When a company becomes insolvent or is likely to become insolvent, the directors’ legal duties change. Instead of primarily acting in the best interests of shareholders, they must now act in the best interests of creditors.

At BRI Business Recovery and Insolvency we offer advice on directors’ responsibilities when a company becomes insolvent.  If you feel this is you then please contact our team, the earlier you seek advice the better the outcome.

How Insolvency is Assessed

There are two ways to test if a company is insolvent:

• Cash flow test – if a company cannot pay its debts as they fall due
• Balance sheet test – have the liabilities exceeded the value of the assets

Once one of these tests has been triggered and the company is considered to become insolvent, the directors’ responsibilities change. The earlier directors can recognise potential insolvency and come to BRI Business Recovery and Insolvency for advice the better so as to protect their position and that of the creditors.

Directors’ Responsibilities When a Company Becomes Insolvent

So, once the company is considered to be insolvent, directors should make decisions that prioritise minimising losses to the creditors over and above what that may mean financially for the shareholders of the company. These are the responsibilities.

1. Co-operate with the Insolvency Practitioner

If a director wishes to instruct an insolvency practitioner (such as BRI) to assist with their company then they must co-operate fully which includes delivering up all company books and records and provide all information concerning the company’s affairs. This enables the insolvency practitioner to advise the directors fully including any potential risks to liability.

2. Trading

Directors should assess whether to continue or cease trading. There must be solid financial reasons to continue to trade. If directors believe the financial position of the company will improve then they could continue but they must document every decision that is made to protect themselves. Continuing to trade when there is no reasonable prospect of avoiding insolvency could expose the directors to personal liability for wrongful trading.

If you’re unsure if your company is in a good position to continue trading then contact our team, we can give you the best advice for your situation.

3. Maintain records

Directors should ensure that all accounting records are complete and up-to-date as far as is possible. Regular board meetings should be held and all decisions taken after the company is found to be insolvent should be documented and minuted.

4. Avoid preferential treatment

Directors should not repay one creditor over another without proper justification. Any transfer or sale of an asset should always be done at market value and no action should be taken that would disadvantage the general body of creditors.

5. Avoid taking new credit

Directors should not incur any further credit or purchase anything that they know cannot be paid for. If purchases have to be made or credit incurred then it should always be justified as necessary and for the benefit of the creditors.

6. Potential Personal Liability

Directors should always consider their duties when considering any aspect of the insolvent company. They may face personal consequences should they not adhere to those duties.

Help with Directors Responsibilities Following Potential Insolvency

Should you wish to discuss your business and potential insolvency then please reach out to any of the BRI Business Recovery and Insolvency management team who will be able to offer a confidential, free and without obligation meeting to discuss.