Company Director Responsibilities
If your company is under pressure from its creditors, insolvent or struggling with a serious financial problem, you have certain duties and responsibilities as a company director that need to be fulfilled. Failing to fulfil your company director responsibilities could lead to a range of legal issues for you and other company directors, including the potential for accusations of wrongful or fraudulent trading and restrictions on your future businesses.
In the event that your company is liquidated or enters into administration, you may also face the possibility of being held personally liable for company debts, including any money you have personally borrowed from the company.
In this guide, we’ll explain the duties you have as a company director. We’ll also look at issues that can arise if you fail to fulfil your company director responsibilities and your company enters into administration or is liquidated.
What should you do if your company is struggling?
All businesses experience ups and downs, from small family-owned businesses to multinational companies. If you’re the director of a company that’s experiencing a financial problem, it’s important that you remain calm and avoid panicking.
As company director, you need to be aware of your company’s financial status, in particular its solvency. Take note of your company’s liabilities and assets to see if your company is insolvent. Your company is legally insolvent if:
Its liabilities (including current and contingent debts) exceeds the total value of its assets, or it is unable to pay its liabilities as and when they fall due.
If your company is insolvent you have a legal responsibility as director to seek professional advice, from someone such as an expert insolvency practitioner, and to prevent your company’s creditors from being placed in a worse position.
What are your director responsibilities during insolvency?
When your company becomes insolvent, one of your responsibilities as director is to ensure that you act in the best interests of its creditors. Creditors include employees, suppliers and lenders that your company has financial obligations to.
Failing to act in the best interests of your company’s creditors during insolvency can result in charges of wrongful or fraudulent trading. These could lead to restrictions on your ability to operate a company, fines and other penalties. Since your director’s obligation is to act in the best interests of creditors, you need to take the action that maximises their ability to recovery what they are owed.
Options for an insolvent but viable company
If your company is viable (for example, it has a proven business model and potential for profitable trading if its current debts are relieved) then you can enter into a wide range of solutions as its director.
These include proposing a company voluntary arrangement (CVA) – an agreement made between your company and its creditors that allows you to repay some or all of your company’s debts over a specific period of time. A CVA gives your company breathing room to restructure its operations, improve its cash flow and gradually repay its creditors. If your company is viable, your creditors and your company could both benefit from a successful CVA.
You also have the option of entering your company into administration. This results in an administrator being appointed to facilitate the sale of your company’s trade and assets in order to repay its creditors, and potentially return your business to profitability.
If your company can prove to lenders that it is creditworthy, it may also be able to raise emergency financing. Speaking to emergency lenders can help you learn which financing options are available to assist your insolvent company.
Options for an insolvent and nonviable company
If your company is nonviable – even with the relief of its debt, it is still incapable of becoming profitable – it can enter into liquidation. There are two types of company liquidation for insolvent businesses: compulsory and voluntary liquidation.
Compulsory liquidation requires your company’s creditors to initiate a High Court winding up order. Through this order, your creditors can facilitate the sale of your company’s assets and the recovery of some of the debts they are owed. As company director, it’s important that you aware of the risks involved in forced liquidation. If you have acted improperly after realising that your company wasn’t solvent, you could face charges of wrongful or fraudulent trading.
Creditors’ voluntary liquidation (CVL) is another form of liquidation. In a CVL, your company closes and opts for its assets to be liquidated in order to repay creditors as part of a voluntary process. As a director, your risk of being charged with wrongful of fraudulent trading is much lower during a CVL than in compulsory liquidation. Despite this, you could still face charges if you have failed to fulfil your director’s responsibilities in insolvency.
If you’re the director of a struggling company, it’s extremely important that you seek advice immediately. Failing to respond properly to insolvency could lead to charges of wrongful or fraudulent trading being made against you.