Insolvency Advice for Directors: Key Considerations

The most important thing to understand as the director of a company approaching insolvency is that your responsibilities change significantly when the company reaches a ‘tipping point’. This point is not just when you become knowingly aware that the company can’t pay its bills, but also when you ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration.

If you find yourself in the challenging position of having to manage the company while arranging for an insolvency procedure, you should also be aware that your actions are under scrutiny, and you must act carefully to avoid personal liability or accusations of wrongful trading further down the line.

It’s important to note that insolvency practitioners have a duty of care to investigate the actions of directors in the period preceding insolvency.

My guide outlines essential dos and don’ts to help you navigate this critical period.

Remember, if you’re unsure about any action, it’s always best to consult a Licensed Insolvency Practitioner such as ourselves for specific advice tailored to your situation.

Seek Professional Advice

Your first and most crucial step when facing potential insolvency is to seek professional advice immediately. This is not just a recommendation; it’s a vital move to protect both your company’s stakeholders and yourself.

Do:

• Consult a Licensed Insolvency Practitioner such as ourselves as soon as possible.

A Licensed Insolvency Practitioner can:

1. Assess your company’s financial position accurately
2. Advise on potential rescue strategies or appropriate insolvency procedures
3. Guide you in fulfilling your legal duties as a director

Don’t:

• Rely on unqualified ‘insolvency advisors’. Many advisors in the market aren’t properly qualified, and following their guidance could lead to serious consequences.

Key Point: Seeking professional help early demonstrates that you’re taking your responsibilities seriously. This can be crucial if your actions come under scrutiny later.

2. Protect Company Assets

Once you’re aware of potential insolvency, protecting the company’s assets becomes a key responsibility. Your actions here can significantly impact the outcome for creditors and your own liability.

Do:

• Take stock of all company assets. This includes:

1. Physical assets like equipment and inventory
2. Intangible assets such as intellectual property
3. Financial assets, including accounts receivable

• Try to collect any outstanding debts owed to the company. As a director, you likely know your customers and the work better than any appointed administrator would.

Don’t:

• Dispose of assets, move them to other companies, or give them to creditors. This could be seen as unfairly preferencing certain creditors over others.
• Sell assets to customers who may offset the monies due to them. This could be viewed as an unfair preference and potentially reversed in formal insolvency proceedings.

Key Point: By carefully managing the company’s assets during this critical period, you’re working to maximise potential returns for creditors and demonstrating your commitment to fulfilling your duties as a director.

3. Manage Financial Transactions Carefully

When your company is facing insolvency, how you handle financial transactions becomes critically important. Your actions here can significantly impact the company’s position and your personal liability.

Do:

• Take control of all company credit cards. Collect cards from directors and other personnel and ensure they are no longer used. Continuing to use credit cards would increase the company’s indebtedness, potentially worsening the position of creditors.

Don’t:

• Pay monies into an overdrawn bank account. This could be seen as treating the bank preferentially, which isn’t fair to other creditors.
• Incur any further credit. Taking on additional debt when you know the company can’t pay its bills could be viewed as wrongful trading.
• Make payments to existing creditors for goods or services already invoiced or supplied. This includes payments to secured creditors and any guarantors of company debts. If you can’t pay all debts, paying some creditors over others could be seen as giving them unfair preference.

Key Point: The key is to maintain the company’s financial position as it is, without making it worse for any creditors.

4. Communicate with Creditors Appropriately

Dealing with creditors during potential insolvency requires a delicate balance. You need to manage their expectations while avoiding actions that could be seen as unfair or preferential.

Do:

• Treat all creditors equally. This is a fundamental principle when a company is approaching insolvency.
• Be cautious about accepting delivery of goods or services. If you accept deliveries knowing the company can’t pay for them, this could be seen as wrongful trading.
• Keep records of all communications with creditors. This can help demonstrate that you’ve acted properly if your conduct comes under scrutiny later.

Don’t:

• Make promises to creditors that you’re not certain you can keep. False assurances could be seen as misconduct.
• Make statements to the press or media about the company’s financial situation. Unauthorised statements could complicate the insolvency process and potentially increase your liability.

Key Point: Remember, the goal is to treat all creditors fairly and not to make the company’s position worse. If you’re unsure about how to handle a particular creditor or situation, consult with your insolvency practitioner for guidance.

5. Maintain Proper Documentation

Proper documentation is crucial when facing potential insolvency. It helps demonstrate that you’ve acted responsibly and can protect you from allegations of misconduct.

Do:

• Try to get your paperwork in order. While you don’t need to produce full, audited accounts, you should compile:

1. A complete list of creditors and amounts owed
2. A list of all debtors and amounts due
3. Details of all company assets

• Keep detailed records of all board meetings and decisions. This includes minutes of meetings and any professional advice received.
• Document the reasoning behind any significant decisions made during this period. This can help explain your actions if they’re questioned later.

Don’t:

• Destroy or alter any company records. This could be seen as misconduct and may lead to serious consequences.

Key Point: Remember, thorough documentation not only helps in the potential insolvency process but also demonstrates your commitment to transparency and proper management.

6. Address Employee Considerations

Dealing with employees during potential insolvency requires careful handling, both from a legal and a human perspective.

Do:

• Put together employee files and bring any returns up to date. This will help employees make appropriate claims for redundancy, pay in lieu of notice, holiday pay, and arrears of wages if necessary.
• Consider your duty to inform and consult employees about the company’s situation, particularly if redundancies may be necessary. However, consult with your insolvency practitioner about the timing and content of such communications.
• Ensure all employee-related taxes and National Insurance contributions are properly accounted for, even if you can’t pay them.

Don’t:

• Make promises to employees about the company’s future or their job security unless you’re certain you can keep them.
• Pay employees preferentially over other creditors. While it may seem fair, it could be seen as an unfair preference.

Key Point: Remember, employees are often among the most affected stakeholders in an insolvency situation. Treating them fairly and transparently, within the bounds of your legal obligations, is crucial.

7. Handle Specific Assets Properly

Certain types of assets require special consideration when a company is facing insolvency. Proper handling of these assets is crucial to avoid legal complications and ensure fair treatment of creditors.

Do:

• Set aside any stock or goods if a creditor claims to have title to them or if you believe they may have a claim over them. It’s only fair that suppliers get back their stock if they have valid retention of title claims.
• Be cautious with intellectual property (IP) assets. Ensure all IP is properly documented and protected, as these can be valuable assets for creditors.

Don’t:

• Use or sell goods that may be subject to retention of title claims until the ownership issue is resolved. Inform your insolvency practitioner about any such claims and let them handle the situation.
• Transfer any company assets, including IP, to other companies or individuals, even if you believe it might ‘save’ part of the business. This could be seen as trying to put assets beyond the reach of creditors.

Key Point: Remember, your role is to preserve the company’s assets for the benefit of all creditors. Any action that appears to favour one creditor or stakeholder over others could lead to serious consequences.

8. Act in a Timely Manner

When a company is facing insolvency, time is of the essence. Delayed action can worsen the company’s position and increase the risk of personal liability for directors.

Do:

• Act promptly as soon as you realize the company may be insolvent. Waiting too long to seek advice or take action could be seen as wrongful trading.
• Implement any advice from your insolvency practitioner quickly. Timely action can often increase the chances of business rescue or, if that’s not possible, maximize returns for creditors.
• Keep your fellow directors and key stakeholders informed of the situation and any actions taken. Ensure everyone is aligned on the approach being taken.

Don’t:

• Delay difficult decisions in the hope that things will improve. While optimism is natural, unrealistic hope can lead to actions that worsen the position of creditors.
• Ignore communications from creditors or legal notices. Responding promptly and appropriately is crucial, even if you can’t meet their demands.

Key Point: Remember, the earlier you act, the more options you’re likely to have. Prompt action demonstrates that you’re taking your responsibilities seriously and can help protect you from potential personal liability.

9. Mind Your Personal Conduct

Your personal conduct as a director becomes even more crucial when your company is facing insolvency. Your actions during this period will be scrutinized closely if formal insolvency proceedings occur.

Do:

• Continue to attend board meetings and participate in decision-making. Disengaging from the process could be seen as a dereliction of duty.
• Keep your personal finances separate from the company’s. Mixing personal and company finances can complicate the insolvency process and potentially increase your liability.
• Be prepared to provide a full account of your actions and decisions if required. Transparency is key to demonstrating that you’ve acted properly.

Don’t:

• Use company assets for personal benefit. This includes seemingly minor things like using company vehicles or expense accounts for personal use.
• Take on personal guarantees for company debts at this stage, unless advised to do so by your insolvency practitioner.

Key Point: Remember, your conduct during this period can significantly impact the outcome of any subsequent investigations into director behaviour. Always act with integrity and in the best interests of the creditors as a whole.

10. Key Takeaways

Area	Action
1. Duty to Creditors	Prioritise the interests of creditors over shareholders when insolvency is likely. Focus on protecting creditors’ rights and minimising their potential losses.
2. Seek Advice	Consult a Licensed Insolvency Practitioner immediately to understand options and avoid personal liability.
3. Protect Assets	Safeguard company assets; do not sell, transfer, or dispose of assets at undervalue. Maintain proper control over all assets.
4. Avoid New Financial Commitments	Do not take on new credit or loans. Refrain from making payments that prefer one creditor over another to prevent accusations of preferential treatment.
5. Communicate with Creditors	Engage with creditors openly and honestly; ensure all creditors are treated equally and fairly.
6. Maintain Accurate Records	Keep detailed and accurate records of all decisions, actions, financial transactions, and communications to ensure transparency.
7. Address Employee Concerns	Communicate with employees about the financial situation clearly and sensitively. Follow all legal requirements concerning employee rights and entitlements.
8. Act Promptly	Take swift action to address financial issues and prevent further deterioration of the company’s situation.
9. Maintain Integrity	Uphold ethical standards; separate personal interests from company matters to avoid conflicts of interest.