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Dos and don'ts for directors of a company on the brink of insolvency

A guide for director's who suspect an insolvency event is imminent.

Do

  • Obtain professional advice in relation to any major decision taken by the company. Insist on any such advice being documented.
  • Hold regular board meetings. All directors should be present so the entire board is aware of the company's financial status.
  • Circulate board minutes immediately after meetings. The minutes will be evidence of whether or not the 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. The board's attitude to pursuing any source of funding should be documented. The list 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 by when financial milestones such as new funding levels for the company must be met. The timetable 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. The timetable should be strictly adhered to.
  • Keep your own written record of all discussions and meetings. This is especially important if you don't agree with a decision that has been made.

Don't

  • Let the company incur any new substantial liabilities until further funding has been secured. An exception is if the board considers any such liabilities are essential and in the best interests of the company.
  • Wait for a winding-up petition to alert you to financial problems. Directors must ensure that they have up-to-date financial information at all times and should closely monitor compliance with any financial covenants contained in arrangements with lenders.
  • Ignore events like creditors putting pressure on the company, the company filing its accounts late or judgments being entered against the company. These could be evidence of insolvency, which a reasonable director should have known about.
  • Delay raising a problem with the rest of the board. As soon as a director is aware there is no reasonable prospect of the company avoiding insolvent liquidation, or fears that this is the case, he must raise the problem with the rest of the board so it can take immediate legal and financial advice.
  • Just resign to avoid the problem. Directors must take every step to minimise potential loss to creditors. If they conclude that the company cannot continue to trade, they must implement one of the insolvency procedures, such as liquidation or administration.
  • Forget to check the terms of your directors' and officers' insurance policy. Make sure you understand the extent of the cover and, if in doubt, obtain professional advice.

If this is something you would like to find out more about, please contact Mandy L Quinn, Partner and Head of the Corporate Team on 0141 333 6750

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