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Act Quickly if Your Company is Getting into Financial Difficulty

By Alexandra Williams

A company’s solvency depends onits ability to pay its debts. When a company is deemed unable to pay its debts,the directors must take all possible steps to minimise loss to creditors.

Liquidators and administrators ofan insolvent company have powers to investigate the company’s affairs and to ascertain whether the directors areguilty of wrongful or fraudulent trading. If their behaviour falls belowthe required standard, they may be personally liable for the company’s debtsand may face disqualification.

‘Wrongful trading’ occurs when adirector knew, or ought to have known, that there was no reasonable prospectthat the company would avoid insolvent liquidation. It is a defence if theperson took every step to minimise the potential loss to creditors, includingseeking specialist, professional advice at the earliest sign of any problems.

The new Small Business,Enterprise and Employment Act 2015 (the SBEE Act) extends the fraudulent andwrongful trading regime, so that administrators now have the same powers asliquidators to bring claims.

‘Fraudulent trading’ actions aremuch rarer and require that the business of the company was carried on withintent to defraud creditors, knowing that they would not be paid.

Further changes to insolvencyprovisions are contained in both the SBEE Act and the Deregulation Act 2015,which are due to commence in phases this year. For example, insolvencypractitioners will be allowed to assign claims (and the proceeds of claims) forwrongful and fraudulent trading, preferences, transactions at undervalue andextortionate credit transactions to third parties. It is thought this couldlead to more claims being brought and therefore more directors being held toaccount for their actions.

It is imperative that directorsof companies in financial trouble take professional advice at the earliestopportunity, to minimise the risk of being accused of wrongful trading.

If youare concerned, call Donal Bannon atMorecrofts on 0151 236 8871 to speak with a knowledgeable insolvency specialistor email djb@morecrofts.co.uk