11 January 2019: When a company finds itself unable to pay its debts, the directors of that company should be alive to a shift in their duties. When a company is solvent, the director has a duty to maximise value for shareholders but, when a company is insolvent, the director’s duty is owed primarily to creditors. Specifically, to take every step to minimise losses to creditors.
The Insolvency Service recently reported that they had disqualified a director of a building company for 6 years, after he admitted to taking money from new customers to fund pre-existing projects, which the company had struggled to complete due to its worsening insolvent financial position.
The disqualification is a clear reminder that directors who unreasonably risk creditors’ money in this way, do so at the risk of facing disqualification from acting as a director.
The Milton Keynes office was recently approached by a director who had concerns about whether his company could enter into new contracts with the looming threat of insolvency on the horizon. We were able to carry out a financial exercise for the client, quantifying whether or not the company had sufficient cash reserves to complete those projects. This involved working closely with the Board and their advisors in order to mitigate the risks to the company of trading whilst insolvent and the consequences to the Board personally.
If you or your client are concerned about a company trading whilst it is, or about to become, insolvent, the best thing you can do is to seek professional advice early. Please contact any one of our experienced management team who can help you to identify your key duties and explain what actions can demonstrate that you acted reasonably in the face of the company’s insolvency.