Can directors take steps to improve the position for creditors?

If a company becomes insolvent (for example where it has net liabilities on its balance sheet) then the directors’ responsibilities switch from acting in the best interests of the company and its shareholders to acting in the best interests of creditors. So should your company be or even become insolvent you actually have a legal obligation to improve the position for creditors if you can.

There are many things that can be done but common amongst these is that the sooner action is taken the more options are usually available and with better outcomes. Of course this is often in directors’ self interest anyway as they, their family and friends are often major creditors.

This is a broad subject so we will limit our suggestions in this email to circumstances where a company is in the immediate run up to an inevitable formal insolvency. The main thing is to get some proper advice – and we would be delighted to provide that should you ever need it – but there are a number of specific steps you can take including:

  • Avoid starting large new contracts that cannot be completed prior to an insolvency. This is particularly true in the construction industry.
  • If you have plant, machinery and vehicles subject to finance agreements with equity consider asking for settlement figures and redeeming the outstanding finance. Otherwise any equity in those agreements will be lost in an insolvency. We can introduce you to ethical bridge finance for this.
  • Focus the company’s resources on completing and invoicing work in progress in the short term.
  • Explore selling the business and assets at a premium – for example to a competitor or your new company – or if that is not achievable then consider selling the customer list. However, there are many pitfalls and both should be done under the guidance of an insolvency practitioner.
  • Time an insolvency appointment after the receipt from a large debtor – as all sorts of arguments not to pay can be raised later on.

None of this may be relevant to your company now but could be at some point in the future. If it is just get in touch and we will guide you through it.

If you would like to know more about our turnaround or insolvency services for businesses or individuals or wish to discuss any specific issues concerning underperforming businesses please contact me. We are happy to have an initial confidential and charge free meeting either face to face, on or off your premises or over the telephone. For further information telephone 0800 331 7417.

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