Director Duties and Corporate Insolvency
When a company faces insolvency, the role and responsibilities of its directors shift significantly. Directors must act carefully, as their duties no longer focus solely on the interests of shareholders, but also on those of creditors. Here are the key obligations directors face when insolvency becomes likely:
Duty to Creditors
Once a company is insolvent or nearing insolvency, directors have a legal duty to prioritize the interests of creditors. This means avoiding actions that might worsen the financial situation, such as incurring additional debts or selling assets at undervalued prices. Failing to act in creditors’ best interests can lead to personal liability.
Avoiding Wrongful Trading
Directors must not allow the company to continue trading if they know, or should know, that insolvency is inevitable and there’s no reasonable chance of recovery. Continuing to trade under these circumstances is known as wrongful trading, and directors can be held personally responsible for the company’s debts if they violate this rule.
Preventing Fraudulent Trading
Fraudulent trading occurs when directors deliberately incur new debts knowing the company cannot repay them. Unlike wrongful trading, which may involve poor judgment, fraudulent trading involves intentional deception. Directors found guilty of fraudulent trading can face civil and criminal penalties, including fines and disqualification from serving as directors.
Filing for Insolvency at the Right Time
Directors must seek professional advice and consider filing for insolvency when it becomes clear that the company cannot continue operating in its current state. Whether it’s entering administration or liquidation, making the decision early can protect directors from potential legal consequences and help maximize returns for creditors.
Maintaining Records
Directors should ensure proper financial records are maintained. Accurate accounting can be used to demonstrate that they acted responsibly and took appropriate steps when insolvency loomed. Lack of documentation can result in claims of negligence or misconduct.
Insolvency Practitioners – Keywood Group
Insolvency law imposes significant obligations on directors, and failing to meet these duties can lead to personal liability and legal penalties. Seeking timely professional advice is essential when insolvency is on the horizon, helping directors navigate these challenges and protect both creditors and themselves.
At Keywood Group we pride ourselves on providing you with clear advice from the outset. Please feel free to contact us for a no obligation consultation either at our offices in Birmingham or at your offices anywhere nationwide about the options available.
