... and please note!!
With the present times being reported as the “greatest global health threat in history” it is inevitable that there are concerns as to the unparalleled distress that the whole global economy will experience. All types of business in every sector will be affected without question. Business is as usual at mfg Solicitors LLP and we’re here to help.
These are extraordinary times and businesses are well advised to give thought to risk and crisis management practices and procedures. A well-considered and comprehensible action plan will assist in survival. Businesses should seek professional advice if in any doubt.
A director is under a duty to act in the best interests of the company and its shareholders. However, once a director forms the view that the company is insolvent, their duty is to act primarily in the interests of the company’s creditors.
If a director allows a company to incur liabilities when they know, or ought to have known, that there is no reasonable prospect of the company avoiding insolvency, they may face personal liability to essentially reimburse the company for the losses sustained (for the benefit of creditors) and/or disqualification as a director. Such claims are usually brought using evidence obtained with the benefit of hindsight.
Many businesses have run into serious financial problems almost over-night whatever the sector they operate in. Whilst the Government has laid out several new initiatives to try and counteract the problems faced (and no doubt there will be more), businesses and those that operate them are well advised to ACT NOW!
From preparing cash-flow forecasts (supported by an insolvency expert where necessary), to reviewing contracts, staying in touch with suppliers and being familiar with the insurance policies so that claims, where appropriate can be made, will allow the business to be managed through these unprecedented times. Additionally, undertaking such actions now, and keeping decisions and actions documented, will assist when any criticism is made as to the conduct of the businesses / directors.
When will a company be deemed to be insolvent?
There are two alternative tests.
- The “cash flow” test - a company is likely to be insolvent on this basis if it cannot pay its debts as they fall due.
- The “balance sheet” test, a company is likely to be deemed to be balance sheet insolvent if its liabilities (taking into account its contingent and prospective liabilities) exceed its assets.
If directors think their company may be insolvent on either test, duties are owed principally to creditors.
What are the consequences if a company continues trading while it is technically insolvent?
Directors should be aware of legal principles of:
- Wrongful trading - where the business continued trading at a time when the directors knew (or should have concluded) that there was no reasonable prospect of the company avoiding an insolvent liquidation and they failed to take every step a reasonably diligent person could be expected to take to minimise loss to creditors.
- Fraudulent trading – where it appears that business trading has been conducted with the intent to defraud creditors or for any fraudulent purpose. To establish this all that is required is that a company continued to carry on business and incurred debts at a time when there was, to the knowledge of the directors, no reasonable prospect of those debts being paid. This is a criminal offence punishable by a fine or imprisonment.
The duties on a Director continue even in these exceptional circumstances. The duty of acting in good faith and in the interests of the company prevails.
PLEASE NOTE – Concerns addressed…
The Business Secretary, Alok Sharma has recently announced that UK Insolvency Laws will be changed in response to the recent pandemic.
It is understood that the changes will give businesses “extra time to weather the storm” and give comfort to directors who, challenged with trading through a difficult cash flow period, will not face claims for wrongful trading.
The planned amendments are designed to appease anxieties that borrowing additional funds offered by the Government could place a director at risk of personal liability. The concerns created from the position set out above may be alleviated.
Intertwined within the proposed changes are that provisions amounting to wrongful trading will momentarily be postponed. This should appease concerns of directors and allow them to take advantage of the financial packages on offer and ensure “that when the crisis passes” businesses are ready to “bounce back.”
The new provisions will apply retrospectively from 1 March 2020, however may not be enacted until after Easter, given that Parliament is in recess.
That said business and their directors must still ensure that they comply with their aforesaid duties. This will not stop suppliers / customers taking legal action for failure to pay invoices or relax their perspectives in relation to taking legal action for breach of contract or other litigious matters. As such professional advice should be taken at the earliest opportunity to avoid issues arising.
For further information or to discuss generally, on an initial no charge basis, please contact Sam Pedley, Partner, mfg Solicitors LLP at firstname.lastname@example.org or call 01562 516119 or 07391 417090.