Despite the help available, many companies will still suffer severe financial distress, and potentially insolvency, as a result of the COVID-19 economic impact. Nick Wood explains what directors can do to protect themselves during this uncertain time.
Whether directors are appointed, shadow or de-facto, they need to be vigilant about the steps they take to navigate their company through financial uncertainty, particularly when facing potential insolvency. Insolvency is when a company is unable to pay its debts when they fall due or the value of its assets is less than its liabilities.
When dealing with insolvency, the focus of directors has to change to act in the interests of creditors above shareholders. Failure to do so can have significant consequences, including a risk of personal liability and disqualification.
Potential issues for directors facing severe company financial distress
Although the government have proposed a three-month break to wrongful trading legislation from 1 March 2020, which would give directors breathing room, this is not carte blanche for directors to continue as normal. Directors must be able to demonstrate that they acted reasonably during the period prior to their company becoming subject to an insolvency procedure (eg, liquidation or administration).
Actions and intent
If a company enters a formal insolvency procedure, the appointed practitioner will review the intent and actions of its directors carefully, looking at matters such as whether one creditor has been preferred over another or if transactions have been completed at an under-value. Consideration will be given to the current situation, but within the framework of insolvency legislation.
No reasonable prospect of avoiding insolvency
The date at which a director knew, or ought to have known that insolvency was on the horizon, is when they must put the interests of creditors first by taking steps to minimise the company’s losses. This date is fact based and situation specific.
Fraud, particularly cyber-attacks, is on the rise in the current climate. Directors should protect their company by implementing correct safety controls and, where needed, seeking specialist advice.
Actions to consider during insolvency
Document all decisions and your reasoning, and consider contingency plans
Important decisions must be documented, such as whether to keep the business trading or to enter into a transaction outside of the usual course of business.
Consider contingency plans with a particular focus on the interests of creditors.
Seek specialist advice on the nature and content of these documents, which will likely be key evidence to rebut any allegations of improper behaviour.
If there is disagreement between directors, document the disagreement to protect against your own liability and consider seeking professional advice.
Hold regular virtual meetings of the board and other management teams, review financial information regularly and align your actions accordingly.
Keep up dialogue with your suppliers, funders and other stakeholders to ensure everyone is informed and battling the uncertainty together.
Seek professional advice immediately if you suspect insolvency
If you consider a formal insolvency procedure may be appropriate for your company or yourself, or if a creditor threatens insolvency procedures, seek advice immediately. Various options are available, and it is important that you understand the consequences of each. Our team can take you through the options, advise on how best to protect you and your company and manage the procedure with you. We will need to enter into a separate arrangement with you personally if you would like personal insolvency advice.
Review the company’s fraud-prevention procedures
In the current context, it's important to assess whether further support is needed, particularly around IT infrastructure. Consider further staff training, data security measures, firewall and anti-malware software and appropriate insurance. If you have any suspicions, our forensic specialists can provide immediate and informed support.
Consider these questions to protect yourself if facing insolvency
Am I aware of and compliant with my duties and potential liabilities as a director under, for example, the Companies Act 2006, Insolvency Act 1986 and Company Directors Disqualification Act 1986?
If I am not an appointed director, could I be deemed as a shadow or de-facto director and face the same duties and potential liabilities?
Has the board of directors considered contingency plans for the future, with the interests of creditors in mind?
Is the company insolvent, or is there no reasonable prospect of avoiding insolvency in the future?
If the company incurs a specific liability, is it reasonably expected that it can be paid when it becomes due?
Should the company continue taking customer deposits?
Are all transactions business-critical?
Is one creditor possibly being preferred over another?
Would a court deem that I, individually, and the board of directors, collectively, have taken all necessary precautions to protect the company and the interests of creditors?
Are appropriate measures in place to protect the company from fraud?
“Pro-active forward planning, with assistance from specialist insolvency professionals when facing financial distress, is critical to protecting your company and yourself. We are here to provide pragmatic and practical advice.”