Section 214 of the Insolvency Act 1986 states that if it appears, when winding up the Company, that, at any time before the commencement of the winding up a director of the Company “ knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation ” then a court may order that director, or those directors, to make a contribution to the assets of the Company.
What should directors do to protect themselves from such claims?
- Obtain professional advice in respect of any major decision to be taken by the Company with regard to measures to keep trading and insist that this advice is documented.
- Hold regular board meetings with all directors present to review the financial position of the Company.
- Circulate board minutes immediately after meetings, this will provide evidence of whether or not the steps taken by the directors minimise the potential loss to creditors of the Company.
- Prepare a list of possible sources of funding for the Company and ensure that this is documented. This list will be useful in identifying when the Company had no reasonable prospect of avoiding insolvent liquidation.
- Draw up a timetable identifying key dates and financial targets for the Company, if the key dates and targets are not reached in accordance with the timetable this will show that the Company has no reasonable prospect of avoiding insolvent liquidation and you must cease trading immediately.
What should directors avoid doing in order to protect themselves from such claims?
- Do not allow the Company to take on new substantial liabilities, unless they are essential to the continuance of the Company and are in the best interests of the Company.
- Do not wait for a winding up petition to be issued before realising that the Company is in financial difficulty. Ensure that you have up to date financial reports available at all times.
- Do not ignore issues such as pressure from creditors; late filing of accounts or judgements being entered against the Company, this is a tell tale sign that the Company can not continue to trade.
- Do not delay in raising with the board your concerns if you believe that the Company has no reasonable prospect of avoiding insolvent liquidation. This should be documented and financial and legal advice must be sought immediately.
- Do not resign, you could still remain liable as you are required to take every step possible to minimise potential loss to creditors and as soon as you believe that you can no longer trade then one of the insolvency procedures i.e. liquidation or administration must be implemented.
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