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Top ten tips for directors of distressed companies

View profile for Julie Hunter
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Top ten tips for directors of distressed companies

Many businesses are facing challenging times. The economic impact of the current climate may last up to 12 months. Sadly, some businesses already in distress will not survive and insolvency is inevitable. For others, the possibility of insolvency is ever present.

This presents another issue for directors of limited companies: ensuring compliance with the duties imposed by the Companies Act and understanding the personal responsibilities and risks faced.

If you are a director of a company facing difficult times you should make sure that you fully understand your obligations and duties. Our guide to directors of failing or insolvent companies provides further information and guidance regarding your duties and liabilities, but here are our top ten tips for directors who are or may be in this difficult position:

1. Know your duties

Make sure that you fully understand and comply with your duties as a director of a limited company under sections 171 – 177 Companies Act 2006.

2. Avoid preferring creditors

As cash flow becomes an issue for all businesses it is tempting to pay those debts owed to associated or connected businesses first, or to pay those creditors shouting loudest. It is your duty to have regard to the interests of all the company’s creditors and not prefer one above others.

3. Agree debt repayment terms where possible

If you can, make informal arrangements with your creditors to pay all liabilities in a fair and even handed way. To avoid future argument put the agreement into writing, an email will do, so each side knows what is agreed.

4. Be proactive in collecting in your debts

Aged and overdue debts are hardest to collect. Already overdue debts are only going to get more difficult to collect. You may be sympathetic to debtor’s excuses for non-payment in times of economic crisis but that will not assist your cash flow problems. Speak to your debtors to agree repayment schedules, deal with any issues or disputes head on and record all of your conversations and any agreement made in writing.

5. Check your terms of business

Also check those of your customers where you are trading on their terms. If a dispute arises the contract and the terms are going to be enforced so it is important that you know what you have contracted to do; your rights under the contract and those of your suppliers and customers.

6. Understand your finance agreements

Check your agreements with your bank and other funders. Make sure you understand what powers the bank has over your business and assets. Check what security the bank holds, that may include an all assets debenture over the company’s property, stock, work in progress and invoices; a legal charge over land or property owned by the company or over property owned by directors. If plant, machinery or office equipment was obtained under a hire or hire purchase agreement check the terms to be clear that you understand the rights of the finance company with regards to the asset.

7. Bank personal guarantees

As a director you may have given your personal guarantee to the company’s bank or funders to pay the sums owed if the company cannot. Typically, banks and funders will have the added security of your personal guarantee – so check to establish the extent of your liability as some are limited in value and some extend to all lending made to the company by the bank and its associated funders, including overdrafts, loans, asset and equipment finance.

8. Suppliers personal guarantees

Some terms of trade or credit applications will include director’s personal guarantees without you realising it. Hidden at the bottom in small print there may be found a clause which amounts to a personal guarantee. It is likely that clause will be enforced if the company becomes insolvent.

9. Premises

If your company rents the premises from which it trades, check the lease: is it in the name of the company or the director personally. If so, as the named tenant you will be responsible for paying the rent.

10. Take professional advice

Now is the time to discuss all your options with your lawyers and accountants. Understanding your legal position and all your options and making a clear plan of action will avoid any additional or unnecessary problems and save costs in the long term.

Contact our commercial law team on 01616966229.