A Directors’ duty to creditors when insolvency is anticipated

A curious thing happens when a director believes his company is about to be insolvent.

Whereas the legal obligation of the director up to this point has been to promote the best interests of the company (Companies Act 2006, section 172) his priority must then change to considering the best interests of creditors.

This can be a very difficult decision for the director make. The company might be experiencing severe cash flow difficulties but he thinks there is perhaps a way to trade out of the problems. A balance sheet deficit might only be a temporary issue and he might have an expectation that assets will soon exceed liabilities. On that basis it may well be in the best interests of creditors that the company continues to trade. Or, it may not. There lies the rub.

In coming to its decision to trade on the director must show that his belief was reasonable, prudent and justifiable.

The following is a snap shot of a checklist for a director in the unhappy position of drawing the conclusion that his company is about to become insolvent –

 

• Make sure your financial data is accurate and up to date
• The Board must meet regularly and minute everything
• Obtain and follow professional advice
• Consider whether it is appropriate to cease trading, and obtain insolvency advice
• Explore and record funding options
• Obtain the support of key creditors
• Manage cash flow and fully record decisions

 

These are just the headline key points to consider. There will inevitably be more.

 

For specialist legal advice relating to the duties of directors contact Stephen Chinnery on 07460 005 769.