The coronavirus is causing serious financial implications for businesses, recent examples include Laura Ashley being one of the first retail casualties of the pandemic, as well as the recent Dixons Carphone announcement confirming its closure of all UK stand-alone stores. This is an uncertain time for many businesses and is unfortunately just the beginning of the pandemic’s effect within the UK. It is therefore essential for you, as a director, to be highly vigilant in assessing the implications the coronavirus will have on your business and formulating coherent action plans to survive.

What is insolvency?

As a director, you are under a duty to act in the best interests of the company and its shareholders. Therefore, if your company is solvent and has no financial concerns amid the coronavirus pandemic, you will owe a fairly limited duty to creditors and shareholders continue to take precedence. However, when your company becomes insolvent or is on the verge of insolvency, your duty as a director shifts.

Your company is deemed to be insolvent if it is unable to pay its debts when they fall due or its liabilities outweigh its assets. This should become clear from a review of the company’s accounts. At the point of insolvency, your responsibility as a director is enhanced, it is not enough to state your fellow director deals with the accounts as you all have equal responsibility. Therefore, it is highly important you consider the points outlined below and remain proactive.

Your duties as a director

As soon as you become aware the company has reached the point of insolvency, your duties as a director shifts to the company’s creditors as a whole. Therefore, every step should be taken in the best interests of the company’s creditors. If you allow the company to incur liabilities when you know, or ought to know, there is no reasonable prospect of the company avoiding insolvency, you can face personal liability to compensate the company for this loss.

If you believe the company cannot be rescued, you must take steps to put the company into a formal insolvency process. Breaching your directors duties can result in personal liability and/or disqualification as a director in the future, and in some cases a criminal prosecution.

How to be proactive when your company is on the verge of insolvency

If your company is facing financial difficulties, you should consider taking the following steps to protect creditors and your own personal liability:

  • When the board of directors become aware of potential financial difficulties, seek independent advice from a lawyer or licensed insolvency practitioner;
  • When deciding whether continuing to trade is a realistic option, take advice from a licensed insolvency practitioner on your options and decide whether a recovery strategy or insolvency strategy is more appropriate;
  • Ensure your actions comply with your duties as you may be scrutinised at a later date by an office-holder if the company enters into a formal insolvency process;
  • Only continue trading if it is the best course of action for creditors as a whole and take steps to minimise the loss to creditors;
  • Keep a good line of communication with all creditors;
  • Have regular board meetings to discuss the company’s financial position, keep details and accurate minutes which set out each step taken to improve the creditor’s position or ensure their interested are not prejudiced. Keeping minutes will assist the board should they be required to explain their decision-making at a later date;
  • When repaying creditors, ensure payments are made only for the course of necessary trading and take advice on the priority of payments to creditors to ensure they are paid correctly;
  • Check with lenders and other key stakeholders to ensure there has not been any breach of financial covenants. Where there has been, take immediate action and involve the company bankers at an early stage;
  • Carefully monitor any demands for payment and legal proceedings served on the company. Make sure you immediately respond to them even if you are not in a position to pay and take legal advice at the earliest opportunity;
  • Ensure regular updated realistic budgets, forecasts and management and trading accounts are reviewed (ideally weekly);
  • Take appropriate external advice from lawyers, accountants and other professionals on an ongoing basis;
  • Ensure accounts are being properly kept up-to-date;
  • Arrange regular meetings with your fellow directors and ensure there is an open and honest flow of information. If responsibilities are delegated, it is your duty to ensure appropriate arrangements are in place to keep the board up-to-date;
  • Conduct a full review of the costs and expenditure of the company. Consider what non-essential expenditure and can be reduced or avoided at an earlier stage;
  • Check what insurance cover the company has, check these policy documents carefully and seek guidance from your broker if necessary; and
  • If there is no reasonable prospect of avoiding insolvent liquidation, you should take immediate advice on instituting a formal insolvency procedure without delay.

It is important that you deal with these issues early on as this can avoid the necessity of a formal insolvency procedure. If you choose to ignore the company’s financial position, this not only worsens the position of the company, it can lead to personal liability. Therefore, you should ensure you consider your position carefully and receive the appropriate advice at the earliest opportunity.

If you are concerned about the potential impact of the pandemic on your business or your business is on the verge of insolvency, please contact the author (Aman Sehgal) who is highly qualified in this area and would be available to discuss your concerns with you. Please do not hesitate to contact on 0191 687 2050

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