Top 10 Tips for Directors of a Struggling Company

October 10, 2012

Directors of UK companies need to navigate a legal minefield when deciding whether their company is fundamentally strong enough to survive.

We set out below 10 practical tips for directors:

  1. Do not ignore the problem

    Recognising that the business is in difficulties and resolving to do something about it, is probably the most important stage in the process.

    Action at an earlier stage may reduce the risk of a director subsequently being personally liable for the debts of the company. Known as wrongful trading, this is where the company is trading and taking on liabilities, when the directors should have concluded there was no reasonable possibility of saving the company.

  2. Take proper advice

    Once a financial problem has been identified, directors should assess whether they need to bring in turnaround/insolvency experts.

    Generalising, when a company is solvent, the directors owe duties to their shareholders. When insolvency is a possibility, the duties are owed to the creditors as a whole. The dual threat of disqualification as a director and personal liability for debts, means that the directors should take proper advice on their legal position.

  3. Establish procedures and stick to them

    To reduce risk of subsequent legal redress, the directors should consider implementing procedures such as the:

    • production of accurate and up-to-date management accounts;
    • review of such management accounts and other relevant trading/financial information at regular minuted board meetings where directors are encouraged to raise any specific concerns;
    • formulation of specific areas of responsibility;
    • review of the position of the company's creditors; and
    • expedite the collections of debts.

  4. Stay with the ship

    Resignation may be appropriate if

    • a Board is refusing to acknowledge the problem and
    • by a director resigning, it forces the spotlight onto the company and requires them to take action. However, resignation will not protect a former director.

  5. Beware the legal pitfalls

    The redundancy process in the UK should be handled with great care to avoid unfair dismissal claims. 

    Decisions to cancel orders should be checked to make sure that there are no penalty clauses being triggered.

    It is also wise to check bank covenants to make sure you are not inadvertently triggering a breach by say, quickly disposing of certain assets.

  6. Consider the stakeholders in the business

    To have any chance of survival it is imperative to keep key players, such as the bank/landlord/employees, on side.

    Often, the bank will be far more sympathetic if it is involved in the process from the start. It is a good idea to have one point of contact, such as the finance director, who is in regular discussions with the bank/landlord.

    A landlord, given notice of a possible default, may be prepared to agree a rent reduction/holiday to keep the tenant paying rent in the long term.

  7. Think the unthinkable

    Every line of costs should be reviewed as well as consideration being given to proposals such as invoice discounting/factoring, stock reduction, outsourcing etc.

    It is also not just a case of trading (and continuing to run the risk of wrongful trading) or by liquidating the company at the first sign of trouble.

    A company voluntary arrangement or administration process should also be considered.

  8. Do not prefer

    A liquidator has the ability to review the actions of a company for up to two years prior to the insolvency (longer if there is evidence that steps were deliberately taken to put assets outside the reach of creditors).

    Sometimes key assets are transferred to connected companies or dividends/bonuses are paid, just as the company is about to fail. If there is no commercial justification for such transactions, they may be subject to legal challenge.

  9. Consider the priority

    The law acknowledges that directors should be allowed to pay for proper advice. However, how creditors are treated on the run up to insolvency will be looked at carefully . For example, directors are often tempted to pay liabilities where they have given personal guarantees. This decision could be attacked as a preference.

  10. Do not lose too much sleep!

    The Government does not want to see directors being sued or barred from future management of companies if there is a legitimate business failure. The insolvency service will generally only instigate disqualification proceedings when there is genuine evidence of serious negligence/fraudulent conduct. Also liquidators will only bring claims for wrongful trading if they are in funds and  conduct was significantly below the standard required.

    In the current climate, many business will fail and the previous stigma attached to a director of a failed company will hopefully reduce.

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Paul Taylor
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ptaylor@foxwilliams.com

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