In March this year, the UK Government suspended wrongful trading provisions so that directors could continue to trade through their companies without any concern that they would be prosecuted. This suspension ended on 30 September 2020.
Directors should not continue trading whilst insolvent to the detriment of the company’s creditors or they will fall foul of the wrongful trading provisions. There are many risks involved with doing this and it can lead to a director being found personally liable.
Now that directors are no longer protected by the suspension of the rules during this period of economic uncertainty, it is essential that they are aware of the steps they should be following should the business become insolvent.
When does a company become ‘insolvent’?
There are a few different ways in which a company can become insolvent, but it is not always clear when this has happened. Below are some of examples of when a company becomes insolvent:
- Cash flow – This is when a company cannot pay its debts on time. If the business cannot pay all of its debts, it is cashflow insolvent, so if it continues to trade, the director could be liable under wrongful trading.
- Balance sheet – This is when a company’s liabilities exceeds its assets. A director will be able to identify this when they review the company’s accounts. Directors must be fully informed of the financial position of the company.
- When a creditor enforces their rights against the company, which is returned unsatisfied.
- When a statutory demand is served on the company, and the debt is not satisfied or secured to the creditor’s satisfaction, or legitimately disputed within 21 days.
If as a director of a company, you notice that any of the points above have been reached, it is your duty to promote the success of the company for the benefit of the shareholders and the company’s creditors as a whole. The company creditors’ best interests come first.
How can a director of a company be found personally liable?
Some of the ways a director can be found liable include:
- If they allow the company to continue to trade whilst there is no reasonable prospect of the company avoiding an insolvent liquidation or administration.
- If they fail to take every step after this point to minimise any further potential loss to the company’s creditors.
- If the company carries on trading with the intent to defraud its creditors or the creditors of any other person.
- If they are found guilty of misfeasance as a result of breaching their duties as a director.
Next steps as a company director
Now that wrongful trading is no longer suspended, directors should ensure that they:
- Act with caution if they begin to notice that their company is having financial difficulties.
- At the earliest opportunity raise any concerns about the company’s finances with their accountants or fellow directors.
- Seek advice from a professional in the early stages to limit their personal liability and prove that they were acting in the best interests of the company by seeking advice.
- Do not resign immediately if they become aware that insolvency cannot be avoided. It is not looked upon favourably, as they could still be liable to contribute to the company’s assets.
- Document decision making throughout any period of financial difficulty and hold regular minuted board meetings.
If you are concerned about the financial position of your company or would like to discuss this further, please contact Aman Sehgal.