Directors’ duties for companies in difficulty

Good Article

This is a very good article.  The first point is important as any director should get insolvency advice from a turnaround practitioner as often initial advice is free and can help put directors minds at rest. 

If a company is in difficulty then the directors also have an obligation not to make the creditors position worse and stopping trading immediately should be considered if the company really has no future and debts are likely to increase.  It is harder to criticise a director that has realised the problem and has not made it worse by continuing.

Good article

I would add 1 to your list of "don't dos" - if there is a personal guarantee in relation to an overdrawn bank account, the directors will be creating a preference in favour of both themselves and the bank by lodging receipts from debtors to the bank account. Where possible, the directors need to hold any monies received and pass them to an incoming liquidator rather than lodging them to the overdrawn account. 

Bradford & Bingley

I just wonder if any of this is relevant to the directors of Bradford & Bingley, among other banks? Was there not a Rights Issue rather late in the day?

Why bother?

My company has had many customers go bust owing us money.  It's a fact of life in our industry and we make provisions for the likelihood.  Generally the pattern is that they buy as much as possible just before the end in an attempt to keep supplies in and production going even if they know that the company is doomed.  And if they don't realise the end is nigh they must be pretty rubbish.

Because they have often done other things to keep the cash flowing (factoring debts, injecting personal loans etc) there is generally no cash at all in the company and the liquidator won't run any kind of investigation because they won't get paid for it out of the proceeds.

Great article - thanks

I found the point about acting for the creditors particularly helpful - I thought you had to cease to trade immediately the company is insolvent but presumably, say, if there are a couple of pieces of profitable work in progress they could be finished up and the profit booked, to everyone's good.

This is a poor article

I take a different opinion to ksagroup for several reasons. To list but a few, this has been written as though it has been extracted from a text book. As far as I can see there is no personal voice. No tales from the coal face. On this site there seems to be little understanding from some people of what happens when a company fails and this article does little to redress that.

In many cases there is no liquidator. In other cases there is sharp practice of directors being given doubtful advice to spend several thousand pounds to wind the company up.

Which brings me to my final points. The one bit of real advice Ms Adams offers is' ...most importantly...don’t resign. This could also be viewed by the liquidator as “failing to meet obligations”.

This bald - and bad - advice comes without any qualification or reference whatsoever. Has she ever seen a liquidator take action for a director resigning? We do not know. We are not told.

My real point, however, is In the case of no liquidator, resignation may progress the companies' end and may also provide directors with protection. For the reasons given, this is a poor article

Good article

As someone who specialises in businesses facing closure (companies, partnerships etc) may I say that I do not agree with zebaa - may I also make a suggestion that he has not read the article as intended.

Nowhere did Jennifer say that an insolvency practitioner is appointed in all cases. All the points made are valid whether a 'one man director' company or a large company with more directors.

Also... its a 'checklist' quoting the tax law as it stands quoting tax cases that might be less well known - there's no room for personal stories.

Good in principle...

Two weeks ago, our customer placed a sizeble order with us which we delivered on credit. Credit rating agencies had them at £10k limit so no problem. A week later we received the Liquidation documents from the Liquidator - has the Director committed some illegal act as he knowingly ordered on credit knowing he was going bust? Retention of Title isn't worth a light in these situations as the customer always moves the goods out before shutting the doors.

And what about the Liquidator - they were obvioulsy in discussions with the customer about liquidation at the time they placed the order. Surely they've failed in their duty as well.

I would like to see some changes in legislation where Liquidators inform Companies House at the outset of discussions with struggling companies so that the credit rating / risk can be adjusted earlier to help us Creditors.

All the theory above is nice, but the reality is the creditor is stitched right up everytime.

Wrongful trading

To knowingly take on credit when you know you cannot pay it is what is known as wrongfully trading and you could be disqualified as a director.  The same applies to taking deposits when you know that you cannot fulfill orders.   The liquidator will not have known that the director had done this prior to his official appointment at the creditors meetings.  Directors lie to the liquidators as well especially when .  Once appointed then the liquidator can look at the transactions.  Of course proving wrongful trading is not easy. 

Wrongful Trading

Nor is proving wrongful trading cheap.  The liquidator will only put any effort into an investigation if their time costs will be re-imbursed.  I understand that this comes from the proceeds of the liquidation so if there is nothing left in the business (usually the case in my experience) there will be no investigation.  Johnny Director can start a new business (blaming the recession for the failure of the old one) and two years later he will go bust again because actually the problem was that he didn't know how to run a business.

And if wrongful trading is proved does anything happen to the directors?  They will have signed any valuable possessions to someone else or taken out a large mortgage on their houses so even if they are found guilty of wrongful trading and made personally liable for any debts they won't have a bean to actually make payments.  Then they start up a new business with someone else listed as director but really they call the shots.

While the article above is no doubt a good summary of the law and directors are supposed to look after the creditors in the event of pending collapse in real life it ain't like that.

Liquidator says "I can't tell you"

For what its worth I agree 100% with The Rogue.  The liquidator reviews the director's or the directors' actions prior to liquidation and, I'm told, sends a report to the Department of ... however the creditor has no right to read this report.  As for Retention of Title, unless your goods are sitting at the back door of the warehouse, untouched, still in their boxes, forget it.