How to avoid directors’ liability

Many businesses will be under enormous strain over coming months. In the article below, Jeremy Whiteson discusses what legal tools are available to help keep the business afloat and avoid directors’ liability

1. Look honestly and realistically at the financial position of the company. In particular, are you able to meet immediate liabilities and, looking forward, is there a time in the foreseeable future when you will run out of cash. In addition to being sensible business planning, this will help protect directors against the risk of personal liability in the event that the business cannot survive.
2. In borderline situations, consider the position of creditors before shareholders. When a company is unable to meet liabilities (or is close to that point) directors’ obligations to creditors rank above shareholders. Evaluate major decisions against interest of creditors as a whole.
3. Take particular care in dealings with directors, shareholders and their families. Directors may be exposed to liability if the company is unable to meet all debts but repays loans, pays directors’ bonuses or gives goods or services on beneficial terms to connected parties. This applies equally to paying down bank loans or other debts guaranteed by directors or shareholders.
4. Do what you can to reduce costs. Landlords, employees and other creditors know how difficult the position is and may be prepared to accept less or be paid later if the alternative is the complete collapse of your business.
5. Use government assistance schemes. A flurry of announcements have come out over recent days weeks offering help with bank loans, employment costs, business rates holidays (for certain sectors) and mortgage holidays. More assistance is promised. Special restructuring procedures for businesses suffering from problems related to C19 and relaxation of wrongful trading risks have also been announced. These need to be read, understood and applied (and we can give you further advice on this).
6. Concentrate on activities most likely to generate cash. Many businesses will have more than one product or service line, at different levels or maturity and with different sensitivities to the current crisis. Consider whether you can close or mothball the least cash generative areas, to be revived when the crisis has passed.
7. Document difficult decisions. Board minutes or even notes of decisions of directors as to why management thought it justifiable to continue trading when cash flow is squeezed, or to take major strategic decisions, will help the business and a protection against personal liability.
8. If you can’t make ends meet use the best restructuring procedures. There are a range of tools available under UK legislation designed to rescue businesses and core assets from companies that cannot meet their liabilities. These include pre-packs, company voluntary arrangements, trading administrations, receiverships, liquidations and a range of more informal arrangements. The range of choices available will be wider and their prospect of success will be higher if you start the process early, before key creditors lose patience, or cash constraints irreparably damage operations.
9. Take advice. Don’t suffer alone. These are uncharted waters and you will need the advice of professionals in the restructuring field to make the right decisions. Taking that advice can, in itself, give you a degree of protection from attack for breach of duty if the business fails.
10. Don’t ignore problems. The best solutions will be found through early and decisive actions. Once you see the problem arise, act swiftly.

For more information, please contact Jeremy Whiteson.