Protecting Your Position: Director Duties When Insolvent.

When your business faces insolvency, a critical shift occurs in your responsibilities as a director. While your usual duty is to promote the success of the company for its shareholders, once the company becomes insolvent (meaning it can't pay its debts when due, or its debts outweigh its assets) or borderline insolvent, your focus legally shifts to taking into account, and them ultimately acting in, the best interests of the company's creditors.

The precise scope of a director’s duties as a company approaches potential insolvency can be difficult to understand and apply to the circumstances of your company, it is recommended that you seek expert guidance as soon as possible. This can be a daunting time, but understanding and fulfilling your duties is paramount to protecting your position and ensuring the best possible outcome for everyone involved.

A Key Focus: The Company's Creditors

In essence, your overriding duty becomes to minimise the losses that creditors might suffer. This means making decisions that are fair and transparent, aiming to reduce the amount of money owed that won't be repaid.

Key responsibilities you must adhere to include:

• Protecting Company Assets: You must take all reasonable steps to safeguard any assets the company still holds. This means ensuring they are not sold for less than their true value or misused.

• Treating All Creditors Equally: You must not unfairly favour one creditor over another (e.g., paying a friend's invoice but neglecting a tax bill). All creditors should be treated equitably, ensuring no one is disadvantaged without proper reason.

• Not Worsening Creditors' Position: You must avoid any actions that could make the company's financial situation worse or increase the amount of debt owed to creditors. This includes not taking on new debt if there's no reasonable prospect of it being repaid.

• Considering Professional Advice: It is crucial to consult with a licensed Insolvency Practitioner (IP) as soon as you believe your company might be insolvent. Their expert guidance is invaluable at this stage.

Understanding Personal Liability

Normally, as a director of a limited company, you are not personally responsible for the company's debts. However, this protection can be lost if you fail to carry out your duties correctly when the company is insolvent (or more generally).

Situations where directors can become personally liable or face serious consequences include, but are not limited to:

• Wrongful Trading: This occurs if you continue to trade the company and incur new debts when you knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.

• Fraudulent Trading: This is a more serious offense involving deliberate dishonesty, where the business is carried on with the intent to defraud creditors.

• Misfeasance: This involves a breach of your general director duties (as outlined in the Companies Act) which causes a loss to the company.

• Compensation Orders: In some cases, courts can order directors to compensate the company's creditors for losses caused by their actions.

• Director Disqualification: You could also be disqualified from acting as a company director for a period if your conduct is deemed unfit.