Directors' Responsibilities

Is the company insolvent?

The company is insolvent if:

• it is unable to pay its debts as they fall due, or;
• the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

Responsibilities if the company is insolvent

The directors' primary duty is to avoid further potential loss to the company's creditors.

Personal liability of directors

If a director has failed to take "every step" they ought to have taken, with a view to minimising the potential loss to the company's creditors, they could incur personal liability. They may also be disqualified from acting as a director.

Steps necessary once insolvency is identified

• Establish an up to date financial position.
• Consider prospects for survival, taking care not to be overly optimistic or unduly pessimistic.

Where viability is not in doubt:

• keep full and proper minutes of reasons for this conclusion and of decisions which are believed to be in the best interests of the company and its creditors;
• ensure that accurate and up to date accounting information is always available and fully understood;
• formulate and implement a prioritised action plan to remedy the company's financial difficulties;
• ensure that the company is up to date with filing accounts at Companies House and complying with all the statutory requirements;
• where a director disagrees with board policy but elects to remain a director, ensure his or her views are properly minuted.

Where viability is in doubt

• Seek the advice of a licensed Insolvency practitioner immediately. An initial consultation with The P&A Partnership is always without charge. If we doubt viability, we will advise the directors to:
• avoid taking further credit and pay cash for future supplies;
• avoid paying any creditors unless it can be justified (and minuted) as being in the best interests of the company and general body of creditors;
• avoid supplying customers who are also creditors of the company;
• take appropriate action to stem losses, either by ceasing to trade or by commencing formal insolvency proceedings. There are a number of formal insolvency proceedings that may enable the business to survive.

Dealing with the dilemma

There will often be situations where the directors identify insolvency and acknowledge that viability is in doubt, but believe that there is a reasonable prospect of survival. In these circumstances it may be inappropriate to commence formal insolvency proceedings.

However, expert professional advice should be sought to protect the interests of the company, its creditors and the directors personally.