With the lockdown being extended for at least another three weeks and the current crisis likely to impact many of our clients for the rest of the year, we are getting lots of questions about insolvency processes.

This is a wide-ranging and complicated subject so we thought we’d start with trying to help with advice on what your duties are as a director right now. To give us a few answers we have thrown a few questions at our favourite insolvency practitioner, Isobel Brett of Bretts Business Recovery ltd.

A4G: Isobel, we understand that the government have relaxed some of the insolvency rules for directors. Is that right?

Isobel: Yes, that’s right. As part of the new measures to support business continuity through the COVID-19 crisis, the Government has temporarily suspended wrongful trading laws for company directors and proposes to introduce other emergency insolvency legislation to aid business at this time.

A4G: Why have they done this?

Isobel: This is a rational move, recognising that directors of business across most sectors must focus on what they can do to survive in the new world regime. And rightly so; company directors have their hands full concentrating on their operations, cashflow, customers and people. Some have had to adapt their entire business model and are dealing with people issues that they could never have imagined having to consider, just to ensure their company lasts through the crisis.

A4G: So directors don’t need to worry anymore that they are going to get prosecuted for something they do now?

Isobel: Not quite! It’s precisely at these times when directors may slip up. Directors have legal and fiduciary obligations to the company and its creditors, particularly whilst they may be trading whilst insolvent. 

A4G: What do you mean by “insolvent”?

Isobel: Insolvency may be defined in two ways: not meeting your liabilities as they fall due and liabilities outweighing assets.

A4G: If it turns out that the company was trading whilst insolvent what are the current implications for the directors?

Isobel: It is not illegal to trade whilst knowingly insolvent but a director should not do so simply in HOPE that things will work out.  There needs to be a clear plan and evidence that you, as a director, have taken your responsibilities seriously.  If not, there are various civil and criminal remedies that an insolvency practitioner may seek.

A4G: Ok, so what sort of things should directors being doing right now?

Isobel: Well there’s quite a lot actually. I would include:

  • Take professional advice – from an insolvency practitioner, your accountant or, possibly, your solicitor
  • Have a business plan, even if it changes daily
  • Ensure that you have management information on debtors, creditors, balance at bank
  • Monitor your cashflow daily/weekly to ensure financial position is not worsened
  • Avoid taking additional credit from suppliers.
  • If deposits are taken, they should be ring-fenced and put into a separate bank account
  • Take positive action to mitigate the consequences for creditors
  • Ensure that you can justify any expenditure in that it will ultimately benefit the creditors
  • Keep contemporaneous notes of all relevant decisions and reasons for making those decisions
  • Have regular board meetings and minute your decisions.
  • You do not delay formal insolvency proceedings if, ultimately, there is no avoiding it.

A4G: If a director thinks that their company is insolvent, should they resign?

Isobel: Absolutely not. If your company goes into liquidation or administration, then the appointed insolvency practitioner is obliged to submit a report to the Secretary of State on the conduct of the Company directors. This includes all directors in the three years proceeding liquidation or administration.  If you resign in that period it is more likely to have a negative effect than if you stay and take the correct action, as your legal and fiduciary duties dictate. A negative report may lead to director disqualification proceedings being brought.

A4G: If one of our clients is worried that they might need to cease trading and instigate insolvency measures, what should they do?

Isobel: Well they can call me if they like. I’m happy to have a no obligation chat with them about their options. We have a free number you can call which is 0808 168 7540. We also have a free resources section on our website that you can access.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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