Business debt advice for directors of distressed companies

Business debt advice for directors of distressed companies

July 8, 2019 by Sandra

Financial distress is a very difficult time for directors. Not only do you have to start navigating insolvency jargon and working out what’s best for your business, but you also need to continue carrying out your day-to-day duties as a director. Because of this, you may start to have conflicting responsibilities; owners of a distressed business need to focus less on shareholders and more on creditors as they shift their focus from business growth to business survival.

Throughout this stressful time, you need to be mindful to minimise losses to creditors and your own personal liabilities as much as possible. Plus, you need to be aware of wrongful trading as this could cause further problems later down the line. At McAlister, we’re experts in giving business debt advice to directors - we understand the frustrations and obstacles faced by many and guide them through the whole process. In this post, we reveal our best advice for directors of distressed companies so that you can start taking the appropriate steps towards a good outcome.

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Be aware of wrongful trading

Section 214 of the Insolvency Act 1986 states that if the directors of a UK company allow it to continue trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation, then the directors can be held personally liable for the debts incurred. Wrongful trading or ‘trading irresponsibly’ is a civil offence. However, wrongful trading can only apply when a business is no longer viable, and will only begin after insolvency proceedings start such as liquidation or administration.

No matter what stage of financial difficulty you’re experiencing, it’s important to always act responsibly and keep a record of all your actions - it may help you in the future! In short, as a director, your actions must be reasonable and responsible in the time preceding your company’s insolvency to avoid wrongful trading proceedings. 

What constitutes for wrongful trading?

  • Not filing your annual returns at Companies House
  • Trading while insolvent
  • Failing to file annual accounts at Companies House
  • Repaying loans to connected-creditors before other creditors
  • Taking on more debt
  • Failing to operate the VAT scheme correctly
  • Failing to pay PAYE 
  • Taking deposits from customers knowing the product won’t be delivered
  • Taking credit from suppliers when there’s ‘no reasonable prospect’ of paying the creditor on time
  • Misusing factoring accounts

To sum up, you must always act in the creditors’ best interests first, even if this means prioritising their needs above your own.

Communicate with all stakeholders

A vital piece of business debt advice is to hold regular meetings with your board members so that everyone is informed of the issues. These meetings should focus on the company’s viability and its chances of avoiding insolvency. You’ll need to assess budgeting and your cash flow, as well as reacting to any potential breaches of financial documents and contracts. By the end of these meetings, you should be able to conclude whether your expenditure can be reduced and sales increased. For example, you may decide whether to focus on restructuring the company, which is time-consuming, or to turn your attention to the day-by-day operations of the company. 

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It’s important that all the interests of stakeholders are considered and acted upon throughout this process, and that you keep everyone informed.  You should also take detailed notes in these meetings to future-proof yourself against future issues, such as wrongful trading. It’s important to keep creditors in the loop, too. Throughout this period of financial insecurity, all creditors should be well informed on the business’s finances, and communication should be made as early as possible to avoid discrepancy later on.

Seek advice early

We can’t stress how important it is that all board members seek financial advice early on so that professional advice can be given on whether or not the company should continue to trade. Working with Insolvency Practitioners will help you to understand what your options are - an expert will assess what’s best for your company, taking into account your individual financial situation.

At McAlister & Co, we help our clients navigate through this stressful time, offering the best business debt advice and taking some of the pressure from you, easing the whole process. Whether you need a CVA or CVL, advice on administration or help during the bankruptcy process, we’ll be on hand to support you through everything.

For an initial free, confidential, no obligation chat, contact a member of our friendly team today. We’ll happily talk through your worries and concerns and assess how we can help.

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