Statistics released in February 2010 have revealed that the number of compulsory liquidations, following the issue of a winding up petition, is increasing.

Previous recessions have shown that, as the economy moves into recovery, the number of businesses facing corporate insolvency increases. The incidences of winding up petitions being issued are, therefore, likely to increase. A new aspect for this post recession period is that many businesses are coming to the end of their 'time to pay' arrangements with HMRC having failed to meet their payments schedule. With HMRC taking a stricter line, failure is likely to result in termination of the arrangement and their instigating a winding up petition.

In the event of a winding up petition being served it is imperative that directors comply with their responsibilities and seek professional advice on the options available for the business as soon as possible.

If your business has or is likely to be served with a winding up petition then you can contact us for an initial free consultation on 0845 603 6253 to speak with one of our Licensed Insolvency Practitioners or alternatively you can email us.

Mercer & Hole's Restructuring & Insolvency team have considerable experience of dealing with a wide variety of insolvency issues. The team specialise in rescuing businesses through operational turnaround and financial restructuring, and through the constructive use of formal insolvency procedures.

Steve Smith is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Steve you can call him on 01727 869141. Email Steve Smith

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Directors' duties

Directors' duties can be onerous at the best of times. The general duties have been codified in the Companies Act 2006 and are summarised simply in the following Ministerial statement:

1. Act in the company’s best interests taking everything you think relevant into account.
2. Obey the company’s constitution and decisions taken under it.
3. Be honest and remember that the company’s property belongs to it and not to you or its shareholders.
4. Be diligent, careful and well informed about the company’s affairs. If you have any special skills or experience use them.
5. Make sure the company keeps records of your decisions.
6. Remember that you remain responsible for the work you give to others.
7. Avoid situations where your interests conflict with those of the company. When in doubt disclose potential conflicts quickly.
8. Seek external advice where necessary, particularly if the company is in financial difficulty.

Troubled companies

But things get more difficult if the company has financial problems.

Directors must recognise that when a company’s assets exceed its liabilities or it cannot pay its debts as they fall due, their primary duty ceases to be to the shareholders and the interests of creditors become paramount.

Failure to carry out his duties with the appropriate degree of skill and care may render a director liable for wrongful trading if he knew or ought to have known that the company could not avoid insolvent liquidation. The guilty director may then be liable to compensate creditors for the losses caused by his conduct. He may also be disqualified from acting as a director for up to 15 years. 

Practical steps

What can you do as a director to protect yourself when your company is in financial difficulties?

1. Hold regular full board meetings and keep comprehensive minutes of commercial decisions and the reasons for them - indeed, keep notes of all significant discussions about the company's affairs.
2. Make sure that you have full financial information and are aware of the extent of creditor pressure, court or recovery action by creditors and disputes.
3. Make sure that the decisions you take are taken in the interests of creditors.
4. Seek specialist advice. You are not expected to know all the answers about how to deal with financial distress.
5. If you know or suspect that there is no reasonable prospect of the company avoiding insolvent liquidation, discuss the situation at a full board meeting with a view to taking specialist advice and initiating a formal insolvency procedure.
6. Take independent advice if fellow directors do not share your concerns about the company’s solvency.
7. Do not take further credit.
8. Take steps to minimise losses to all creditors equally.

Points 7 and 8 can be particularly challenging in the real world and will be much easier to deal with if you have the benefit of specialist insolvency advice.

Seek advice early as this not only protects you as a director, it widens the options for rescue and turnaround action.

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