A director’s do’s and don’ts when a company is insolvent
A company becomes insolvent when it can no longer pay its debts when they are due or the value of its contingent liabilities (its current liabilities and those expected in the future) outweigh its assets. At that point, the legal duties of the company director(s) switch from promoting the business’s success for its shareholders to acting in the best interests of those it owes money to (its creditors).
In practice, there are multiple steps you must take to protect your creditors’ interests. Here we explain what those duties and responsibilities are and the potential consequences if you fail to meet them.
My company is insolvent – what should I do?
My company is insolvent – what should I do?
You should always keep a close eye on a company’s financial position, but it becomes even more important when the business is struggling. When you know or ought to know your company is insolvent, that’s when your duty to your creditors will arise. If you are unsure whether your company is insolvent, seek expert advice from a licensed Insolvency Practitioner to accurately assess your situation.
Importantly, you cannot just walk away from an insolvent company. Seeking advice and following the correct process will help you avoid serious consequences for you personally. Whether you can save the company will depend on its specific circumstances, but you must ensure your creditors are treated fairly by minimising the amount of money they are owed.
What are my duties as a director of an insolvent company?
Once you are aware that your company is insolvent, you must:
- Make sure you do not worsen the financial position of your creditors by creating further debts you cannot pay
- Protect the company’s assets for the benefit of your creditors
- Treat all your creditors equally by not paying some ahead of others
- Seek professional advice from an Insolvency Practitioner
Practically speaking, the first step is to cease trading to protect your creditors from further losses. That is something you will need to discuss with an Insolvency Practitioner. In some cases, they may advise that you continue trading temporarily if it will improve your creditors’ position.
Seeking professional shows that you understand the seriousness of the situation and are committed to protecting the interests of your creditors and adhering to your legal duties. An Insolvency Practitioner will be able to advise you on the potential rescue or closure options for your company and the behaviours you should avoid.
Practical tips to meet your responsibilities
Practical tips to meet your responsibilities
- Monitor your financial position closely when there’s a risk of insolvency
- Convene board meetings regularly and keep detailed minutes to document decisions
- Inform your creditors of the company’s position and keep them updated
- Enforce credit control procedures and collect payments promptly
- Avoid making dividend payments if you do not have sufficient profits
- Seek advice before extending credit facilities
- Avoid transactions that do not benefit your creditor group as a whole
Behaviours to avoid as the director of an insolvent company
Behaviours to avoid as the director of an insolvent company
If your company is insolvent and subsequently enters Administration or Liquidation, the administrator or liquidator will investigate the reasons for the company’s insolvency and the conduct of the directors. If they find that you engaged in any of the following in the period leading up to or during the insolvency, you could receive a penalty.
Trading while insolvent
If you continue trading when you know or ought to know the company is insolvent and incur further debts as a result, you could be accused of wrongful trading.
Selling assets for less than their true value
What are the penalties if you do not adhere to your legal duties?
What are the penalties if you do not adhere to your legal duties?
If the administrator or liquidator investigating your behaviour finds evidence of misconduct, they will send a report to the Insolvency Service. It can impose fines and make directors personally liable for the payment of company debts. It can also disqualify you from acting as a director for up to 15 years. In the case of fraudulent trading, you can receive a maximum prison sentence of 10 years.
Need advice?
Need advice?
If you are worried that your Scottish company is insolvent, contact our team of Insolvency Practitioners at your earliest opportunity. We offer a free consultation to assess your situation, discuss your options and advise you on the steps you can take to protect your position personally. Get in touch or arrange an in-person meeting at one of our offices in Scotland.
