The rapid downturn in the economy means company directors are faced with new challenges, possibly on a greater scale and more complex than ever before. Directors are responsible for managing the affairs of a company, identifying risk and ensuring that there is a strategy and a system in place to deal with those risks.
Weak and inadequate management by the directors may contribute to a weak financial performance and can lead to damage to business reputation, adverse media attention and damage to the business itself.
The following are some tips to assist directors to properly discharge their duties and responsibilities and reduce the risks of restriction or disqualification as a director and personal liability.
Meetings and Internal Procedures
- Ensure that regular board meetings are held in particular to discuss the company's financial performance. All directors of the company should actively participate in these board meetings. Detailed minutes should be kept of all discussions in relation to the current state of the company's finances together with any suggestions proffered by directors as to how the company should deal with the situation.
- Every director should make it their business to be kept fully informed of all matters. While the Supreme Court has recently recognised a distinction between the nature and extent of a non-executive director's responsibility and that of an executive director, it has held that a non-executive director has a general overriding duty to supervise and control the affairs of a company. A non-executive director should therefore ensure that he has adequate and up to date information in relation to the financial affairs of the company.
- Ensure financial controls are in place and maintained, including the maintenance of proper accounting records. This helps to ensure that the company is not unnecessarily exposed to avoidable financial risks.
- Conduct a thorough evaluation of the nature and extent of the
risks to which the company is exposed. Design a structure and
implement a system to manage these risks and minimise liability.
Consider establishing a dedicated risk management committee and
review risk management regularly at full board meetings.
Professional Advice - If the directors are of the opinion that the company is in financial difficulty which may ultimately lead to the company being wound up, they should immediately seek professional advice, legal and financial. The indicators of financial difficulty will often vary depending on the type of company and the type of business carried on.
- It should be noted in board minutes that such professional
advice has been sought and received. These minutes are good
evidence that the directors, upon becoming aware of the situation,
took immediate steps to remedy the situation and indicate that they
were performing their duties to the standard required of them. The
professional advice sought by the directors usually relates to the
continued viability of the business, funding, any potential
redundancies and payments to creditors.
Viability of the Business - Consider the financial status of the company on an ongoing basis and constantly review the decision to continue trading. These constant reviews should be based on up to date and accurate financial information and should ultimately determine whether the business is viable going forward. The financial information sought may include an analysis of budgets, cash flow projections, bank facilities and borrowings, creditors and bad debts.
- The viability of the business depends on many factors including the company's market share and the state of the market itself. Indicators of a non-viable business might include a collapse of the market, a high fixed cost base and long term loss making contracts. If it is ultimately determined that the business is not viable going forward, the directorsshould seek advice on placing the company into liquidation.
- If it is determined that the business is viable, regard should
be had to preparing a programme with a view to ultimately
increasing revenue while minimising expenditure and putting in
place a sufficient cash flow which will hopefully lead to the
company regaining a profitable trading position. Consideration
could, subject to suitable specialist professional advice, be given
to reducing staff numbers and disposing of those parts of the
business which are clearly not performing well in the current
economic climate. If you are thinking about reducing headcount and
need to make staff redundant, you should take good legal advice and
implement appropriate selection procedures to ensure that the
redundancy programme complies with the law
Creditors - Ordinarily, the directors of a company act in the interests of a company and its shareholders but where insolvency is a probability or even a real possibility, the directors have a duty to act in the interests of the creditors of the company. In this respect, every measure must be taken to minimise loss to creditors.
- Examine each situation where a debt is to be incurred to ensure that the directors honestly believe on reasonable grounds that the company will be able to repay the debt.
- Keep track of outstanding debts. Operate sensible credit limits and payment terms and do your best to ensure your terms are complied with. Do not supply any further goods or services until the account is brought up to date. As soon as a debt falls due, demand payment by way of both phone call and letter, take appropriate recovery action if necessary and refer the matter to your legal advisors. Ensure you keep a full diary of events while chasing.
- Carefully minute the reasons behind any decision to make a
payment to one creditor over others. If any such payment is made
with a dominant intention to prefer one creditor over others and is
made within six months of the commencement of a winding up, such a
payment may be deemed to be a fraudulent preference. Where the
preferred creditor is a connected person, the period is extended to
two years prior to a winding up. A preferential payment made for
other reasons – such as a threat to discontinue supply of
vital components – should not be deemed a fraudulent
preference, hence the advisability of recording the reasons for
payment.
Annual Filings - Ensure that the annual accounts, annual return and all tax
returns are prepared and submitted on a timely basis. A late filing
penalty of €100 becomes due in respect of an annual return
on the day after the expiry of the filing deadline with a daily
penalty amount of €3 accruing thereafter up to a maximum
penalty of €1,200 per return. In addition, an on the spot
fine may be imposed by the Companies Registration Office and/or
summary proceedings brought against the company and/or any officer
in default where the company has a record of persistent late
filing. A company may also be struck off the register and dissolved
for failure to file an annual return. Importantly, where an annual
return is filed late, the company loses its entitlement to claim
audit exemption not only for the year in question but for the
following year also.
Insolvency Options - Consider whether there is benefit in petitioning the court for the appointment of an examiner. The court cannot however make an order appointing an examiner unless it is satisfied that there is a reasonable prospect of survival of the company and a substantial part of its business as a going concern. The principal rationale behind the concept of examinership is to allow companies a period of protection from creditor action, during which a third party (the examiner) has an opportunity to examine the affairs of the company. If there is a prospect of survival of the company, or all or part of its undertaking as a going concern, the examiner has opportunity to formulate a scheme of arrangement in order to facilitate such survival.
- Ultimately, if there is no reasonable prospect of the company surviving and it is considered not to be in the best interests of the creditors to continue trading, a decision should be taken to place the company into liquidation.
Summary
Poor management by the directors is one of the key reasons why businesses fail. Now more than ever, directors must display strong leadership skills and navigate the business through the current downturn.
The challenge for directors is to ensure that there are adequate systems and procedures in place in the business to identify and manage risks. A key part of managing risk is having a corporate culture that promotes good communication and a good reporting structure at all levels of the organisation. That way, directors have an effective flow of information allowing risks to be anticipated and avoided or mitigated at an early stage. Consult with and keep the lines of communication open with your professional advisors, who can give valuable advice at an early stage. Risk management should not be seen as an impediment but as an essential part of the success of the business, particularly in an economic downturn.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.