Avoiding Company Insolvency: Actions Directors Should Take
It is essential Directors ensure their company does not trade in a way that causes insolvency or trade while it is insolvent. Directors are personally liable for failure to fulfil this duty. Their personal assets may be at risk if it's proven the company traded while insolvent. Moreover, trading while insolvent may lead to criminal liability.
Knowing that a company is insolvent is trickier than it looks. There are no visible or telltale signs that the company is going down. Some companies may become insolvent due to the type of business they are operating, such as trading in commodity prices.
It's expected that Directors keep an eye on cash flow and other financial records, invoices, payment of creditors and repayment of any long-term loans the company has entered into. Steps should be taken to address the matter before it goes out of hand. The worst thing is to bury your head in the sand in the hope that the issue will disappear on its own.
Elements of Possible Breach of Duty
Some debt incurred by the company
The company becomes insolvent or is already insolvent
There are reasonable grounds to prove that the insolvency came about because of incurring debt.
The issue at hand is to have reasonable grounds to suspect insolvency. The court of law also tries to determine if the Directors knew before taking on the debt that the company had become insolvent. If it can be proved by the court, it does not matter whether the Director did not take the necessary steps or was not aware of the insolvency. Directors are criminally liable for failing to prevent a company from incurring debt that ends up making the company insolvent. You must evaluate every business transaction and determine if your business has the capacity to repay the contract. If not, you could be sued for the decision to incur the debt as being dishonest or misleading. The penalties upon conviction could include time in jail, or other penalties and fines as determined by the court.
WHAT DO I DO NOW?
Contact us if you would like to have more information on managing the legal risks involved with possible company insolvency. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.