In their capacity as directors of a Company, directors owe certain duties to the company.
However in insolvency, the Company’s principal duty is to its creditors and not the company or its shareholders. Additionally, a director may incur personal liability for continuing to trade when the company is or nearing insolvency.
Therefore as soon as a director is aware or fears that the Company has no reasonable prospect of avoiding insolvency, they must talk to the Company’s board and take immediate independent advice. It is important that they also talk to our business management team or Relationship Manager, who are experienced at helping companies in times of financial difficulty.
Below are some practical considerations that may help directors comply with their statutory obligations both in identifying instances of financial distress and dealing with such instances when they cannot otherwise be avoided.
Monitor performance against forecasts on a regular basis and act quickly to implement change where problems are identified.
Issues may arise from creditor pressure including unpaid taxes. Directors should ensure adequate controls to identify where there is a shortfall of cash to meet payments due.
Be mindful of covenants and engage in open dialogue with the bank or other lenders and investors where a breach is forecast.
An external advisor (for example the company accountant or solicitor) may be well placed to add challenge to director’s decision making.
Including sale of non core assets and/or sale of the business where other options have been exhausted. A sale should only be considered where this is in the best interest of the creditors in a financially distressed situation.
Where it becomes clear that the business is in serious difficulty, seek early advice from an insolvency practitioner. This is fundamentally in the best interest of the directors, the company and its creditors.
If the company were to enter an insolvency process, it is likely that the behaviours of directors in the run up to insolvency would be closely scrutinised, forming part of the insolvency practitioners investigation into directors conduct.
The company should hold regular board meetings to monitor and discuss the company’s financial position, consider how expenditure can be reduced, and keep detailed minutes of these meetings.
The company should ensure that financial records are maintained.
Resignation should be a last resort and it is important that this is discussed with the Bank and with the board in advance. Resignation will not absolve a director of personal liability in respect of past actions.
Early identification of financial difficulty
Directors should be aware of early warning signs as financial distress can have significant implications for both the company and personally for directors.
Important legal information
Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278. Telephone: 020 7626 1500
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This page provides you with a broad overview of Directors' responsibilities where a company is in financial difficulty. It is not designed to constitute legal advice and as such if your business is experiencing financial difficulty it is recommended that you always seek independent legal and financial advice.
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