Directors' responsibilities FAQs

What does insolvency mean?

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

  1. The balance sheet test: the Court is satisfied that the company’s liabilities are greater than its assets
  2. The cashflow test: the Court is satisfied that the company cannot pay its debts when due

This can be evidenced by:

  • Failure to satisfy a statutory demand
  • Failure to satisfy a judgement debt

What is directors disqualification?

A liquidator or administrator has a statutory duty to report to the Insolvency Service on the conduct of every director of companies that are the subject of insolvency proceedings (company voluntary arrangements excepted).  The Insolvency Service then considers whether the conduct of the director warrants disqualification which can be between two and 15 years.

Can a director be made personally liable for the company's debts?

Generally not, unless you have given personal guarantees, usually to banks or finance companies. However if a director breaks the law he/she can be personally liable for wrongful trading or break of duty (relatively recently identified in the Companies Act).

I am not involved in the company's finances, can I be held liable?

As a director you are collectively responsible for the actions of the board of directors even if you dissented from a decision. 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 and review of regular management accounts and forecasts. If you are in doubt ask questions of your fellow directors. Ultimately if you disagree with your fellow directors the only way to be sure to avoid personal liability is to resign as a director.

Can a liquidator take action against me?

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

  • Breach of duty
  • 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 know or ought to have known the company was insolvency
  • Fraudulent trading – trading by the company designed to defraud its creditors
  • Transactions defrauding creditors – ie where assets are placed out

What should I do?

The short answer is to seek professional advice, the longer answer varies depending on your circumstances but consider the following:

  • Prepare a 13 week cashflow forecast to establish that you can keep the business trading whilst you take advice to consider your options
  • Prepare a 12 month financial forecast to show if the business is profitable and able to work within funding lines
  • Be clear whether the business can trade out of its difficulties – it can often help to carry out a sensitivity analysis on key forecast assumption
  • Talk to your senior colleagues, your professional advisers or a valued business contact and ask them to challenge your forecast
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