Directors Duties for Companies in Difficulty
27 April 2012
A Director’s prime duty is to manage the company for the benefit of shareholders except in a situation where the company is experiencing trading difficulties and insolvency is a real possibility. At this point, his/her prime duty is to the creditors of the company.
As soon as it is recognised that a company is having difficulties a director needs to:- Seek professional advice
- Keep the company’s books and accounts up-to-date
- Prepare a statement of affairs of the company
- Identify any part of the business capable of rescue and any possible sources of funding
- Conduct regular board meetings with all directors to discuss the company’s position, keeping minutes of all meetings
- Determine the final ‘point of no return’ after which the company would cease
- Be aware that directors could be made personally liable for any debts should there be a breach of duty, fraudulent or wrongful trading
- Retain the employees necessary for the continued running of the business
- Ascertain which goods are subject to ‘retention of title’ clauses in the conditions of sale where legal ownership does not pass until the buyer has paid for the goods
Once the decision has been taken to cease trading, the directors should:
- Not incur any further credit
- If the usual practice is to take deposits from customers suggest placing those deposits in a separate bank account and only accept if the contract can be fulfilled
- Not dispose of company assets at an undervalue
- Sometimes directors buy assets personally to inject monies into the company; if so the transaction must be at “arms length” and if in excess of £2,000 formal written board resolution allowing the sale is needed.
- Not pay one creditor to the detriment of another
- Not make payments to satisfy directors loans
- Not conceal or destroy any company books or papers
And most importantly...don’t resign. This could also be viewed by the liquidator as “failing to meet obligations”.
Should you want to discuss any of the issues above, you can speak to Ruairi Maginn in our Lurgan office or email him at ruairi@dalypark.com or Darragh Cotter in our Newry office or email him at darragh@dalypark.com