UK: Worried About Your Company Becoming Insolvent?

Last Updated: 29 September 2009
Article by Andrew Kerr

Directors of a company on the brink of insolvency should take extra care in how they carry out their duties to avoid the risk of liability for wrongful trading under the Insolvency Act 1986. In such circumstances it is advisable for directors to do the following:

  • obtain professional advice from a solicitor and/or insolvency practitioner in relation to any major decision taken by the company and insist on such advice being documented;
  • hold regular board meetings at which all directors should be present so that the entire board is aware of the company's financial status;
  • circulate board minutes immediately after meetings as this will provide evidence of whether or not steps taken by the directors minimise the potential loss for the company's creditors for the purpose of avoiding liability for wrongful trading;
  • draw up a list of all possible sources of funding for the company as this will be useful for the board in identifying the time at which the company no longer had any reasonable prospect of avoiding insolvent liquidation for the purpose of avoiding liability for wrongful trading.
  • draw up a timetable for when financial milestones such as new funding levels for the company must be met. The timetable should be strictly adhered to and it should identify the time at which the company's failure to meet a milestone will mean that there is no reasonable prospect of the company avoiding insolvent liquidation.

It is also wise for director's to avoid:

  • letting the company incur any new substantial liabilities until further funding has been secured, with the exception of circumstances where the board considers any such liabilities being essential and in the best interests of the Company;
  • waiting for a winding up petition to alert the board to financial problems and directors should ensure that they have up to date financial information at all times, compliance with financial covenants in arrangements with lenders should also be closely monitored;
  • ignoring events such as creditors putting pressure on the company, the company filing its accounts late or judgments being entered against the company as these could be evidence of insolvency which a reasonable director should have known about;
  • delays in raising a problem with the rest of the board as it is important for the board to take immediate legal and financial advice as soon as a director is aware, or fears, that there is no reasonable prospect of the company avoiding insolvent liquidation;
  • simply resigning to avoid the problem as directors must take every step to minimise potential loss to creditors and if they conclude that the company cannot continue to trade they must implement one of the insolvency procedures.

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.

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