Corporate governance law reforms include changes to residential address publicat...
Reform of the Companies Act and removing the requirement to publish directors’ addresses are things we have long lobbied for.
Insolvency can have a number of implications for directors. Here is what you should – and shouldn’t – do.
When a business is facing solvency issues, the scope of options available decreases as financial distress increases. Directors need to consider the options available and whether continuing to trade is in the best interests of the company and its creditors.
Acting early can increase the probability of a turnaround and lessen the likelihood of more extreme measures later.
Directors should address solvency issues early by undertaking a realistic assessment of the business’ ability to recover. Early action can help reduce risk to creditors and the board.
Directors may be optimistic about the future but they may be putting themselves and others at risk.
By trading while insolvent, a company is effectively trading with creditor’s funding which is being put at risk. New creditors may also be exposed to loss that they would not have been if the company had liquidated earlier. If the company fails, its creditors may go unpaid and may become insolvent themselves.
The director duties under the Companies Act that are most relevant to insolvency scenarios are:
The most common breach of these duties that leads to personal liability is allowing a company to trade while it is insolvent in circumstances where it would not be objectively reasonable to continue trading.
When a company enters troubled waters its directors should carry out a sober assessment as to the company’s actual and prospective financial position and performance, and the potential for remedying the insolvency. This assessment is not a one-off exercise and instead requires consistent and regular monitoring of whether the company is financially viable and:
If a company reaches the point where continued trading will result in a shortfall to creditors and the company is not salvageable, then continued trading will be in breach of the Companies Act, absent an agreement with creditors through a formal or informal restructuring process.
Directors should seek advice from a suitably qualified legal advisor and/or insolvency practitioner that addresses their specific circumstances and provides a view on what options should be considered.
Read the Solvency Guidance report in full.