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If your company is experiencing cashflow/trading difficulties and you are unsure of your position, seek professional advice.

It is the responsibility of all directors to ensure that they are aware of the company’s financial position. It is important that when a business is in financial difficulties that:

• Directors hold regular board meetings and maintain detailed board minutes.
• Major decisions are recorded and the rationale for the decisions detailed.
• Financial reports are kept up to date and maintained. These should include management accounts, cashflow projections and forecasts.
• All directors must make themselves aware of the financial position of the company.
• Take appropriate steps at the right time in the light of available information.
• Seek professional advice.

Actions that can be taken against directors can be summarised as follows:

• Preference – ie any payments which could be deemed pursuant to Section 239 of the Insolvency Act 1986 to prefer one creditor against another.
• Transactions at an undervalue – ie disposal of goods or services at less than their market value.
• Wrongful trading – ie continuing to trade after the directors knew or ought to have known the company was insolvent.
• Fraudulent trading – trading by the company designed to defraud its creditors.
• Transactions defrauding creditors – ie where assets are placed out of reach of creditors at any time for the primary purpose of defeating a claim on them.

As a director you are collectively responsible for the actions of the company. It is your responsibility to ensure that you are fully informed of the company’s financial position. This can be by means of attendance at board meetings or review of regular management accounts. If you are in doubt ask questions of your fellow directors.

A Liquidator or Administrator has a statutory duty to report to the DTI on the conduct of every director of companies that are the subject of insolvency proceedings (company voluntary arrangements excepted). The DTI considers the report and considers whether the conduct of the director warrants disqualification. The period of disqualification is for a period of between two and 15 years.

Insolvency in its simple sense means that a business is unable to pay its debts as and when they fall due. Four tests exist to show insolvency and any one of them can be used by the Court to prove insolvency:

• Failure to satisfy a statutory demand.
• Failure to satisfy a judgement debt.
• The balance sheet test: the Court is satisfied that the company’s liabilities are greater than its assets.
• The cashflow test: the Court is satisfied that the company cannot pay its debts when due.

Generally ‘No’ other than if you have given personal guarantees,

usually to the bank or finance companies. However, in circumstances where a director has traded on making losses for too long he can be personally sued by the Liquidator for the company’s losses. Also certain transactions which made the company insolvent or were made when the company was insolvent can be set aside by a Liquidator (see section 5 & 6 below).