Proactivity is the key to successfully surviving insolvency
Insolvencies are not an uncommon occurrence, with the actions of Board members being scrutinised more than ever. Unless they are clear about their duties, it will be difficult for businesses to successfully emerge unharmed on the other side of an insolvency situation.
Directors in large organisations are like ‘super employees’, due to their specialism and control over all operations. They are often more risk adverse and can benefit from D&O cover. However, directors at mid-tier firms and SMEs are much more influential when it comes to maintaining the business’ reputation and financial prosperity. As a result, they are more likely to take risks and worry about personal liability, should they make poor decisions that damage the business.
Of course, division and delegation of tasks is still necessary, but directors do have personal responsibilities that they cannot avoid. These responsibilities include ensuring they are fully aware of the company’s affairs, working together with fellow directors to supervise and manage accordingly. It is not enough to passively monitor the company, directors must form their own opinions and ensure every decision made is in the company’s best interests.
Should a business be on the edge of insolvency, the duty of directors to promote the company becomes one that is in the best interest of creditors. Allowing the business to continue trading and incur further losses may put directors at risk of personal liability for the organisation’s debts.
The conduct of a director is something that the office holder will investigate after the collapse of a business. Should they decide that legal action needs to be taken and the director is found personally liable, they could end up losing their home, along with other assets.
To ensure a director can effectively carry out their role, a basic training programme should be introduced for future directors and Board members, teaching them how to react at the first sign of an insolvency. Reacting incorrectly, such as through using the company’s money that is owed to the Crown for PAYE/NIC etc. as working capital to tide the business over, can cause serious issues in the future.
It is also essential that directors keep books and records up-to-date and accurate, so they are aware of the company’s financial position. Office holders may ask to see these in order to inform their investigations after a business collapse.
Insolvency situations are sometimes unavoidable and never pleasant, but if the worst does occur, taking a proactive approach can help directors to keep their business afloat.
It is imperative that directors seek advice at the first sign of a potential insolvency situation to avoid a real risk of being charged with personal liability for the company’s debts.
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