Being a Director when things get tough

Ordinarily as a Director you are under a duty to act in the best interests of the Company and its Shareholders.

When a Company starts to experience financial difficulties you have a duty to consider the interests of the creditors if you are to avoid exposing yourself to personal liability. Below are some dos and don’ts you might want to consider if your Company is starting to experience financial difficulties:

Do:

• Ensure you understand your responsibilities as a Director;
• Obtain professional advice early in relation to any major decision taken by the Company and insist on such advice being documented;
• Hold regular Board meetings to ensure that all of the Board is aware of the Company’s financial status;
• Circulate Board minutes immediately after the meetings – this evidences whether or not steps taken by the Directors to minimise the potential loss for the Company’s creditors have been taken;
• Draw up a list of all possible sources of funding for the Company – this will be useful for the Board in identifying the time at which the Company no longer had any reasonable prospect of avoiding insolvent liquidation;
• Draw up a timetable by when financial milestones such as new funding levels for the Company, must be met. The timetable should be strictly adhered to;
• Keep your own written record of all discussions and meetings – this is especially important if you don’t agree with a decision that has been made.

Don’t:

• Let the Company incur any new substantial liabilities until it is clear how such liabilities will be paid – an exception may be if the Board considers any such liabilities are essential and in the best interests of the Company and its creditors.
• Let the Company take any action which might be a reviewable transaction. Reviewable transactions, if the Company later goes into insolvency, include preferences and transactions at an under value and such transactions can be set aside and the Directors can be disqualified for allowing them;
• Wait for a winding up petition to alert you to the Company’s financial problems;
• Delay raising a problem with the rest of the Board;
• Resign to avoid the problem;
• Forget to check the terms of your Director’s and officer’s insurance policy.