Liquidation – what directors need to do in advance

Liquidation – what directors need to do in advance

When a company finds itself heading for liquidation, the directors can often face many demands on their time and attention.

If they are taking an active role in the business the directors may well be spending all their time working on ways to save the firm rather than thinking about the worst case scenario however there are some things that all directors need to consider.

The first thing to bear in mind is that in the case of insolvency or company liquidation, the focus changes from trying to return value to the shareholder to getting the best possible deal for creditors.

With this in mind the appointed receiver may choose to run the business in the hope of a sale or might choose to liquidate, in either case it is one of their responsibilities to report to the court on the conduct of the directors leading up to the point where the business got into trouble.

Consequently it’s vital that those in charge of the company’s affairs are seen to be acting in the best interests of the company and its creditors or they could face surcharges, fines and even disqualification.

It’s important that directors stop trading immediately that it becomes clear the business needs help.

This means absolutely no taking of deposits or entering into contracts and agreements when there is a good chance that they won’t be honoured. The directors need to show that they have acted in a responsible manner.

Similarly, there must be no more purchases made on credit, even if that means that jobs will need to be delayed. If there is work in progress and the Official Receiver feels it is prudent to complete the work then they will authorise any spending but directors must be able to prove that they didn’t incur further debts when repayment was impossible.

Directors must not dispose of assets of the company before it goes into liquidation. It may be tempting to sell off a car or machine to bring some cash in but this has to be the receiver’s decision. In the same vein, directors must absolutely not buy assets or sell them to friends or relatives as this could be seen as an attempt to spirit away value that rightfully belongs to creditors.

Although it may be part of the day to day work of the company, taking on any leases or long term finance deals when it is doubtful that the payments can be maintained is a bad move.

Most companies will maintain a directors loan account. Often this will be monies owed from the directors to the company, such as an advance against possible future dividends. This will need to be repaid and will be chased in the same way as any other debtor. What directors should definitely not do is to take extra money from the company shortly before insolvency.

Directors will need to ensure that all records and accounts of the business are available for the Receiver to complete their work. It’s important also that these are complete and any unexplained gaps will certainly be questioned.

Often suppliers and landlords will require a directors guarantee to ensure that in the event of business failure they will have some recourse. Clearly once a business gets into trouble there is an increased likelihood of the guarantees being called upon and it is tempting to try and get them removed in advance.

Directors will need to be careful how they proceed here. Using company money to buy out a guarantee will surely be seen as prejudicing the creditors’ interest and the receiver will no doubt want to look at the issue in detail.

It should be borne in mind in all of the above cases that the receiver has the option of voiding transactions that are contrary to the interests of those who are owed money. It is also important to note that directors can be held liable if they are seen to have acted against these interests and may face legal action for redress or in extreme cases disqualification.

Once an insolvency practitioner has been appointed they have a series of statutory duties which protect creditor rights. As a result directors need to be extremely careful how they proceed once it is clear that the company is in difficulty and it is important to get proper advice as soon as possible to give the maximum chance of a good outcome.

 

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