Difficult Times - Know Your Director's Duties. Now More Important Than Ever
In the ordinary course of business, the duties of directors are to the Company and its shareholders, but upon the approach of insolvency, the rules change and that duty shifts so that directors are obliged to act to safeguard the interest of their creditors instead.
The point at which the interest of creditors becomes paramount, is the moment in time when the directors know that it is likely that the Company is at risk of Insolvency which means they will go into liquidation or administration.
From this point forward, the directors have to take steps to minimise the potential loss to the Company's creditors. If they cannot demonstrate that this has been undertaken, then they may be required to contribute personally to the Company's assets.
To avoid having to contribute personally to the Company's assets, directors must ensure the following:-
- That the Board holds meetings on a regular and timely basis. These would normally be weekly but in some cases daily telephone board meetings may be appropriate. If you want to do this by phone, make sure you check your articles of association to ensure that telephone board meetings are permitted.
- That plans are in place to be able to convene a meeting of directors without delay in the case of emergency. You must be able to meet quickly, without delay because in a crisis, crucial decisions may need to be made within minutes or hours.
- That all directors including non-executive directors are provided regularly with up to date and accurate information on the trading and financial position of the Company. You would think that this is obvious, but we are often surprised by how many directors are not sent or do not ask for this valuable information.
- That directors have proper risk analysis procedures in place. This means dangers to the business can be identified and wherever possible minimised or else contingency plans agreed so they can be met in the most effective way. Rick management should always be part of your business strategy, but if it isn't you need to implement it quickly.
- That Board meetings record the strategy being followed by the Board and the business and assumptions upon which they believe there are reasonable prospects for avoiding Insolvency or minimising the potential losses to creditors.
This could be for example that additional funding is likely to be raised or continued trading would enable a going concern sale to be achieved.
- That no further credit should be incurred until the Board are confident that the danger has passed, or the person providing the credit has been fully appraised of the situation to understand the risk. This is particularly important and of course doesn't include minor cash purchases absolutely required for the day to day running of your business.
- That significant purchases or commitments should be paid for on delivery, unless the supplier is informed and agrees to take the risk. Directors of Companies in difficultly are often surprised that key suppliers or creditors who are informed of the situation may be willing to support the business by continuing supplies or extending credit. It is important that suppliers and creditors receiving the information are required to keep it confidential.
- That any transactions with connected persons or close friends should only be entered into on the basis that it is at full and independently verifiable open market value or better. It's really important that if you do this you can clearly demonstrate the commercial justification for the transaction.
- That the Board has taken appropriate professional advice, either legal advice and/or from an insolvency practitioner on a timely basis. You need to demonstrate that you have acted on the basis of the advice received, or have clearly recorded your reasons for not doing so.
- That the Board should avoid or declare any conflicts of interest fully at the earliest opportunity and you make it clear these conflicts do not affect any decision. This is particularly important if a director or a number of directors wish to buy some or all of the assets from an administration or liquidation.
Making It Work For You
There are a large number of requirements to adhere to and this can seem very daunting, especially when you are focusing on trying to save your business. But you must be able to demonstrate that you have taken the steps outlined above.
Taking advice from a specialist is crucial at a time like this and you need to demonstrate that you have done so. We can guide you through this difficult time and we will provide both the practical advice and legal expertise needed to give you support.
To find out how Metcalfes can help you, you can call us on:-
0117 945 3040 - Tony Forster
0117 945 3042 - Marti Burgess
0117 945 3094 - Natasha Bliss
Contact
Tony Forster Head of Company Commercial
Martino Burgess Associate
Natasha Bliss Associate
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The above notes are intended as guidance to Companies and their directors who can see real dangers ahead. Every situation is different and directors are advised to take professional advice as early as possible. Whilst we hope these guidance notes are helpful they are not a substitute for such advice and are offered free of charge and without liability on our part.