Running a successful company can be stressful, but when a business falls on hard times, and creditors are waiting to be paid, it can be a hugely testing time for any director. Keith Tully, partner at Real Business Rescue, provides some tips on how to negotiate the threat of insolvency.

When a company is consistently pursued by creditors, and appears to be approaching insolvency, it becomes incumbent on directors to place creditors’ interests before those of the company as a whole.

This distinct shift in focus is required to avoid personal liability for company debts, and potential accusations of unlawful trading. It's a legal requirement for company liquidators to report on the conduct of directors, but there are actions you can take to mitigate the risks of these allegations.

Be open with creditors

Creditors' interests should be at the forefront of your mind as the director of a company facing insolvency. Minimising creditor losses is the ultimate aim, and engaging with them in an open manner should gain their trust. Provide them with accurate information when requested, and keep the lines of communication open.

Take professional advice

Knowing exactly when to cease trading can be difficult. It's a fine line between the company experiencing ongoing financial difficulties, and the descent into formal insolvency. A professional Insolvency Practitioner (IP) will guide you, and be able to help you avoid accusations of trading while insolvent.

As a director, you may feel the need to carry on trading for honourable reasons, such as staff retention, but it's an area that requires professional support.

Don't put your own money in

There's no obligation to put your own money into the company in an attempt to save it from failure. Its limited liability structure makes it a separate legal entity, with no liability implied for you as a director. The only time you may become personally liable is if business has been conducted improperly.

Keep a written record of all meetings

It’s a good idea to hold frequent board meetings to review the changing situation. Closely monitoring the company’s financial position demonstrates a commitment to dealing with these issues, but it is also important to keep a written note of all discussions, to record how and why decisions were made, for example, and the steps you are taking to recover and control the situation.

Maintain clear financial records

If a clear route into insolvency can be seen from company financial records, it may help to shorten the duration of an investigation. Keeping detailed and accurate financial records, and making them readily available to the IP will smooth out a difficult process. Use your accountant to help you to gather this information, if necessary.

Do not incur further credit

This will worsen the position of creditors as a whole, and could be viewed as acting in an improper manner. You may think that incurring further credit to trade yourself out of the situation is a good idea, but when you are approaching insolvency, you need to reduce expenditure and consider the effects of your actions on existing creditors.

Protect company assets

The value of company assets must be protected, so make sure they are insured and secure. Directors who try to sell company assets, or otherwise dispose of them, can face allegations of misconduct during an investigation. This includes moving assets into another company, or giving them to creditors in lieu of payment.

About the author

Keith Tully, partner at Real Business Rescue, has been involved in corporate insolvency for over 20 years, and is experienced in advising company directors facing financial distress.