Understanding your legal obligations as a company director when facing financial difficulties and how to protect yourself from personal liability.
As a company director, you have specific legal duties that become critical when your business faces financial difficulties. Understanding these responsibilities and acting appropriately can protect you from personal liability and potential disqualification.
Under the Companies Act 2006, directors have seven key statutory duties that remain in force even when a company is experiencing financial difficulties. These duties are designed to protect the company, its shareholders, and creditors.
When your company approaches insolvency, your duties as a director shift significantly. The interests of creditors begin to take precedence over shareholders, and you must take steps to minimize potential losses to creditors.
A company is insolvent when it cannot pay its debts as they fall due (cash flow insolvency) or when its liabilities exceed its assets (balance sheet insolvency). Once you know or should have known about insolvency, your legal position changes dramatically.
Wrongful trading occurs when a director allows a company to continue trading when they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. This can result in personal liability for company debts.
Implement robust financial monitoring systems to identify potential insolvency early. This includes regular cash flow forecasting, management accounts, and solvency testing.
Keep detailed records of all board decisions, especially those relating to the company's financial position and any professional advice received.
Don't delay in seeking professional advice when financial difficulties become apparent. Early intervention can often prevent more serious consequences.
Don't navigate director responsibilities alone. Our experienced team can help you understand your obligations and protect your interests.