When a company is faced with the prospect of insolvency there are a number of steps that directors should take to safeguard their interests:

 

1 ACT HONESTLY AND RESPONSIBLY
In relation to both reckless trading and restriction orders, the extent to which a director acts “honestly and responsibly” in relation to the affairs of the company is of paramount importance.

 

2 INFORMATION
You must acquaint yourself with the financial situation of the company on a week-to-week or even a day-to-day basis so that you can exercise your business judgement as to when the company has reached a point where there is no reasonable hope of recovery.  As soon as this point is reached, you should immediately take steps to wind up the company.
  
3 CEASING TRADING
If you continue to trade after the point when it ceases to be reasonable to expect an upturn in the company’s fortunes, then you are trading recklessly.  This would also be taken into account by a court in deciding whether to place you under a restriction order. The reckless trading provisions do not apply during a period when a company is under the protection of the court, for example, examinership.

 

4 TEMPORARY DIP
If a business goes through a temporary dip in its fortunes the directors will not be liable for reckless trading if they honestly and reasonably believe that the company can continue to trade successfully after a brief interval during which it is technically insolvent. 

 

5 INCUR NO FURTHER CREDIT
If the directors wish to continue to trade while insolvent, the safest course of action is to neither incur further credit nor reduce the assets of the company.  This course of action can only be justified if the continuation of trading is likely to protect, if not increase, the assets which will ultimately be available to creditors in the event of a liquidation.

 

6 COMPETENT OUTSIDE ADVICE
You should not assume that the safest course of action is to stop trading.  A director can be equally faulted for a premature cessation of trading as for continuing to trade while insolvent.  This makes it essential to obtain competent external advice. 

 

7 BUSINESS REVIEW
If the business is viable, you should insist on the preparation of a sensible and constructive business review by a suitably qualified professional to reduce expenditure, ensure adequate cash flow and restore the company to profitable trading.  This may involve disposing of unprofitable or marginal parts of the business and dismissing staff who are surplus to the company’s needs. 

 

8 ACCOUNTS
You should ensure that the board regularly receives a full, accurate and up to date picture of the company’s trading and financial position. Where there is a failure to keep proper books of account the Companies Act 1990 provides that personal liability can be imposed on any officer in default.

 

9 BOARD MEETINGS
You should insist on frequent board meetings and ensure that there is a proper distribution of responsibility throughout the company. Where board meetings are infrequent or not occurring at all, this should be challenged and you should preserve any correspondence with your fellow directors in this regard. You should insist that all recommendations for remedial action made by the directors (and particularly by you) together with your dissent from any unwise actions or inactivity advocated by your fellow directors are fully minuted. 

 

10 KEEPING CREDITORS INFORMED
You should keep major creditors informed and enlist their support for the continued operation of the company where this is likely to benefit them.  It is important to have the support of major unsecured creditors as well as secured creditors as they are more likely to suffer loss and their support will make it easier to demonstrate subsequently that you took every step available to you to minimise loss.

  

In summary the law does not penalise or seek to impose liability on company directors merely because their business fails. Sanctions are only imposed on directors of failing companies if they have failed to observe their obligations under the Companies Acts or have continued to trade beyond the point at which the company ceased to have any reasonable prospect of solvency. 

  

Directors cannot plead ignorance in their defence.  They are expected to be armed with accurate financial information about the company’s affairs.  This means involving your accountants in discussions, holding regular board meetings to review the situation and ultimately reaching a decision as to whether the company is viable or not.  If the company does not have a viable future then the sooner you take steps to liquidate the company the better.