Insolvency: What are the Legal Responsibilities placed on Directors?

Directors of financially troubled companies need to take extra care in these difficult times. Simon Parker of City based Insolvency Practitioners Antony Batty & Company LLP outlines the current legislation as regards trading whilst knowingly insolvent and comes up with some practical advice.

A company is legally insolvent if it either does not have assets to cover its liabilities, or it is unable to pay its debts as they fall due. If this is the case directors should be aware of the following responsibilities imposed on them by the Insolvency Act 1986 and must avoid the following, “four sins”.

Wrongful trading  
Once directors know that there is no reasonable prospect that a company can avoid insolvent liquidation, they must do everything possible to minimise the potential loss to the company’s creditors. If directors incur credit when they knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, they may be found personally liable for any credit incurred.

Fraudulent Trading
Arises if business has been carried on with the intent to defraud creditors, for example if a debt was incurred when the directors knew that there was little prospect of the debt ever being paid or indeed where there was no prospect of it being paid within a reasonable time of it falling due.

Preferences
Directors should ensure that they are not influenced by a desire to prefer one creditor to another.

Transactions at an undervalue
Any transaction involving the disposal of a company’s assets must be at “arms length” and for full value. 

It is important to stress that a director who knowingly breaches the above may be held to be personally liable to any creditor who suffers as a result.

Practical steps
Directors who believe that the company may be insolvent can take the following practical steps to minimize the risk of a wrongful trading action should the company fail to avoid insolvent liquidation

• Regular board meetings should be held and minutes kept detailing all important commercial decisions.
• It is essential that the directors have to hand up to date accounts and cash flow information.
• Decisions taken should be in the interests of all creditors.
• If the directors believe that there is a prospect of the company avoiding insolvent liquidation then they should seek the advice of a licensed insolvency practitioner ensuring at the same time that they do not take further credit from this point.

Seeking advice at an early stage will not only help directors avoid personal liability, it will also widen the options available, including the survival of the business using rescue and turnaround techniques.

Antony Batty & Company LLP has four Licensed Insolvency Practitioners who are available to give advice at short notice, initial consultations are always free of charge. If directors are in any doubt about the solvency of their company they should call us on 0207 831 1234.