Advice to Directors

Insolvency Checklist

Firms may be forced into insolvency for any number of reasons, but for the directors of distressed companies, there is the added burden of complying with all the legal requirements placed on them both before and after a firm is declared insolvent. A director who does not comply with those requirements may find themselves facing court action or even disqualification.

Causes of insolvency

Insolvency can be brought about by a number of factors, and in many cases these problems may become apparent before the company becomes insolvent. Signs of imminent danger of insolvency include:

• Ongoing losses or poor cash flow
• High and/or increasing levels of debt
• Bad debts or difficulty collecting debts
• Inability to raise further funds from lenders or shareholders
• Solicitors’ letters, demands, court judgements or winding-up petition served
• Difficulty selling stock

If insolvency could have reasonably been predicted, and a director has taken no action to protect shareholders, suppliers or creditors, they could be in breach of their legal duties.

Directors’ legal duties

The directors have various duties under the law, which are relevant when a company enters insolvency.

Common law

• Duty to act in the best interests of shareholders and creditors

Insolvency Act 1986

• Duty not to engage in wrongful trading (continuing to trade when insolvency is likely).
• Duty not to engage in fraudulent trading (carrying out business with the intent to defraud creditors).
• Duty not to engage in misfeasance (receipt of money or property from the company, other than normal remuneration, to the detriment of the company) or breach of duty (such as failing to pay contributions or making loans which do not benefit the company).
• Duty not to carry out pre-insolvency transactions which can later be challenged by creditors.
• Duty not to commit fraud or misconduct.

Companies Act 2006

• Duty to act within directors’ powers
• Duty to promote the company’s success
• Duty to exercise independent judgement
• Duty to exercise reasonable care, skill and diligence
• Duty to avoid conflicts of interest
• Duty not to accept benefits from third parties
• Duty to declare interests in proposed transactions
• Duty to keep proper accounting records
• Duty to prepare directors’ report
• Duty to file annual accounts, directors’ and auditors’ reports
• Duty not to make unlawful distribution out of profits

Company Directors Disqualification Act 1986

• Duty to act honestly and for the benefit of the company
• Duty to act with degree of skill as may reasonably be expected
• Duty to comply with statutory obligations imposed by relevant legislation

The following actions may lead to disqualification under the act:

• Taking unwarranted risks with creditors’ or shareholders’ money
• Taking unfair advantage of the position of director
• Serious failure to comply with statutory duties and company law

Proving compliance with legal duties

Taking the correct steps when a company begins to hit trouble and, just as importantly, recording those steps correctly is one way to ensure directors are seen to have complied with their obligations. These steps may include:

• Recording professional advice received and steps taken in response
• Taking minutes of board meetings
• Recording all commercial decisions by directors
• Record accurate financial information
• Take steps to protect creditors
• Keep investors and banks up to date with decisions
• Draw up contingency plans, with notes of significant deadlines or targets

For more information please contact us.

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The insolvency licence holders of this practice are licensed as insolvency practitioners in the UK and Ireland by the Institute of Chartered Accountants in England and Wales.

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