Businesses are already struggling, coming under increasing cash flow pressure.
With no certainty as to when conditions will change, those with management responsibility are concerned about the future viability of their organisations, as well as their own personal liability should insolvency proceedings begin.
The following is designed to provide some high-level guidance on the risks for management under English law.
The best advice is to get advice. The legal framework does not penalise managers who obtain and implement professional advice.
Limited liability companies shield those who own and manage them from personal liability in the event of failure of the business.
The Companies Act provides a statutory organisation of the duties owed by those who are directors of a company, although they can also apply to others. Generally, those who are responsible for directing the company’s affairs must act in its best interests.
These duties are owed to the company for the benefit of its shareholders. So, if shareholders ratify a decision, act or omission of the directors, there is no breach of duty.
But there is an important change of emphasis at times when a company is, or is likely to become, insolvent. At that time, duties are still owed to the company, but for the benefit of its creditors, as a whole. Ratification by shareholders will not exonerate the directors from breach of duty, and nor will acting in compliance with contractual arrangements between the company and shareholders.
Duties are not only owed by directors (whether performing a non-executive role or otherwise), but also by:
- Those who are shadow directors, meaning those upon whose directions the actual directors are accustomed to act
- Those who are de facto directors, meaning those who perform roles normally associated with a director.
The capacity in which (or whether) a person attends the board meeting is irrelevant, what matters is their degree of influence and participation.
On an application by an administrator or liquidator, directors (in the wide sense described above) can be ordered by the court to contribute to the assets of a company if they failed to minimise losses at a time when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.
The contribution would equate to the difference between the overall deficit to creditors and that which it would have been when wrongful trading commenced.
The prospect of insolvent liquidation is, essentially, a function of cashflow and the attitude of creditors whose debts are, or are soon to become, overdue.
Where a company is loss-making, continuing to trade increases losses to creditors.
However, where there is a real prospect of the company surviving, continuing to trade is unlikely to be wrongful, but attempts should be made to stem losses wherever possible.
Conversely, when it becomes clear that the company will not survive, unless losses are no longer accruing, there is a prospect of continued trading being wrongful.
In current circumstances, it may be that nothing can be done to stem losses and efforts should be directed at preserving value for the benefit of creditors, as a whole. It would be prudent to produce accurate minutes of board meetings to provide a clear paper trail of decision-making.
Anyone who is knowingly a party to a company recklessly incurring credit (or taking a deposit) when there is no reasonable prospect of meeting the debt (or providing the promised goods or services) could be liable for fraudulent trading, for which there are both civil and criminal sanctions.
Deceit / Misrepresentation
Making a statement known to be false, upon which a party could be expected to rely and did rely to their detriment, can render the person who made it (irrespective of their status or title) liable in damages for deceit or misrepresentation to that person.
All administrators and liquidators are obliged to file a report on the conduct of directors with the Insolvency Service, which may bring proceedings seeking to disqualify a person from holding the office of the director of a company for between 2 and 15 years.
Prosecution for disqualification is very rare; in practice, only cases concerning serious misconduct, substantial losses to creditors or reoffence will result in an application being made.
What are the options?
The risks outlined here may be mitigated by seeking and following professional advice, from either or both specialist lawyers and Insolvency Practitioners.
They may be able to help identify and develop a strategy to help a company survive, through either financial or operational means. This may involve:
- Compromises with all or some financial or operational creditors
- Debt for equity transfers
- A Corporate Voluntary Arrangement
- Dilution or replacement of shareholders
- Temporary or permanent changes within management
They could also help with a strategy that helps the business survive although the company that currently operates it does not, through restructuring or sales of elements of the business.
If the threat of insolvency is real, seeking and following advice if the most effective way to manage personal liability risk.