Practical advice for directors of distressed companies

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Practical advice for directors of distressed companies

While a company is doing well, the law requires that the directors work to ensure the continuing success of the company for the benefit of the shareholders. It’s a duty that is owed to the company itself, and to the shareholders as a whole, not just one or some.  When a company starts to suffer the law requires the directors’ focus to change – they must now pay more regards to the interests of the creditors rather than the shareholders.  If they don’t, then the directors can be held to account, they could be disqualified and / or be made to personally contribute for the financial damage they have caused.

This change in focus can be the opposite of how the directors used to run the business in successful times.

Here are our tips for what to do, and not do, in these tough times…

Continuing/ceasing to trade

Unless things are really bad, there is no immediate need for the company to cease trading – after all it’s not unreasonable for the directors to be given a little time to take proper advice on their options and what their duties are – now is not the time for a knee-jerk reaction.

More regular board meetings

It is vital that formal board meetings are held more often than they were in the good times and that they be properly documented.  The topics for exploration should include:

  • The company’s viability
  • The cash flow forecasts
  • The balance sheet
  • The options open to the avoid insolvency
  • How the interests of the different stakeholders (trade creditors, HMRC, Pensions, employees, shareholders) are affected
  • How likely it is the company might avoid liquidation or administration.

Where a group of companies is involved, a board meeting should be held for each group company to consider its individual circumstances separately.

Appropriate advice

It is vital the directors employ the right advisers, professionals who are experienced in supporting companies in this financial position.  The right adviser could be an insolvency practitioner or lawyer.  You need to get that advice in writing.  And follow it – if you are given professional advice and go against it, this will be held against you.

Business Review

You need to carry out a root and branch review of the company and business to see:

  • What cost savings can be made
  • How the cash flows can be improved

This should be reported to the directors, decisions made, and action taken and documented.

Employ the right people to make things happen

You may not have the time or skills to do what is necessary, what is decided upon.  You need to employ the right person(s) to make it happen, to make it more than a pipe dream.

Engage

Think about engaging with creditors, including HMRC, and shareholders.  Especially when there are major decisions to be made over any continuation / cessation of trade or restructuring say through a CVA.

Plan for other outcomes

Directors’ plans can fail for any number of reasons outside of their control.  It makes sense to have several alternative solutions, even including administration or liquidation.  Think about instructing an insolvency practitioner to have the alternative of administration ‘ready in a box’ to be rolled out at short notice if needed.

Don’t run away!

It’s not a crime being involved in the management of a company that’s struggling, and even the most successful international businessmen have at some time or other been involved with companies that have struggled – in fact more often than you’d think.  Neither the Insolvency Service nor any insolvency practitioner will take too kindly to any directors who get out when the going gets tough.  Being a responsible director means facing the music when the times are bad, and not just taking the cream in the good times.  I’m saying this because whilst my experience of typical trading companies run for profit shows that their directors do not run away, but my experience of companies that are not run for profit is somewhat different – there I see the ‘great and good’ and members of political parties running for cover.  It’s worthwhile bearing in mind the fact that whether you’re not paid to act as a director or not, the same standards are required of you, and if you’ve resigned, you no longer have any control over what goes on yet you are still accountable for what’s gone on in the past.

Conclusion

 It’s never easy managing a business that is distressed and at risk of failing.  As the circumstances are different every time, what you are required to do and can do as a director do will vary, the above are only very general guidelines.  You will need all the help you can get because what is expected of you and what you can do are so very different from before when times were good, so there is no substitute for timely professional advice and support.

By |2019-05-16T10:25:43+00:00May 16th, 2019|Administration, English Insolvency Law, Liquidation|0 Comments

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