During normal profitable trading, a Director’s primary duty is to the shareholders of the Company with a secondary duty to stakeholders generally.

However, if you are a Director of a Company which is experiencing financial difficulties, you need to be mindful of the change in your duties to a broader responsibility to minimise the loss to the Company's creditors as well.

One of the easiest ways to consider your duties as a Director of a Company in financial difficulties is to understand the potential courses of action an Insolvency Practitioner could take against you and the consequences of these. We have set out the most common examples below.

As well as the specific items below, you can also find out about being a director again, the directors' disqualification act and reuse of Company names on our dedicated page here.

Misfeasance

Misfeasance is probably the broadest course of action available to an Insolvency Practitioner as it basically means any breach of duty.

What can Directors do to Protect Themselves?

As a Director, it is important to ensure that you conduct yourself in accordance with statutory duties but how do you demonstrate that you have actually done so? Whilst there is no definitive answer to this question, a simple approach is to consider what an independent third party would think of any actions you have taken. With this in mind, we have set out a list of suggested steps below, but this is by no means exhaustive:

• Keep minutes of all major decisions
• Keep sales of assets at arm’s length
• Maintain good physical security over Company assets
• Hold customer deposits in a separate bank account and do not mix these with Company funds
• Maintain management accounts and review these regularly
• Seek professional advice in respect of any specialist issues you encounter
• Ensure appropriate insurance is in place at all times
• Don’t take out further credit if you have identified that the Company is in financial difficulty
• Don’t prioritise one creditor over others of the same class
• Provide honest and transparent information when seeking finance

In practical terms, misfeasance action is typically taken is respect of misuse of Company funds which could include:

• Payment of dividends to shareholders when the Company did not have sufficient reserves (known as unlawful dividends).
• Payment of excessive loans to Directors or connect parties.

The remedy for misfeasance is restitution of the position or compensation. This typically means repayment of the unlawful dividends or Directors’ loans.

Wrongful Trading

Also referred to as trading whilst insolvent, wrongful trading occurs when a Company is insolvent and the Directors knew or ought to have concluded that formal insolvency proceedings were unavoidable and they did not take all steps to minimise the loss to creditors.

Whether a Director knew or ought to have known that formal insolvency could not be avoided is down to the general knowledge and skill expected of a Director of the type of Company concerned and of the specific Director. For example, a greater expectation of knowledge would be placed on a Director with formal accountancy qualifications than one with no formal financial training or background.

The remedy for wrongful trading is that the Directors can be made liable for an amount equal to the additional losses suffered from the date they should have concluded that formal insolvency was unavoidable.

Transactions at an Undervalue

A transaction at an undervalue (or TUV for short) is any transaction in which assets of the Company are sold for less than they are worth.

Insolvency Practitioners can take action to have a TUV reversed or to recover an amount equal to the undervalue for any transactions occurring in the 2 years immediately prior to formal insolvency. In order for recovery to be successful, the Company must have been insolvent at the date of the TUV but this is assumed to be the case in respect of transactions with connected parties. As such, it would be on the Directors and beneficiary of the transaction to demonstrate the Company was not insolvent at the date of the transaction.

Preference Payments

A preference payment is a payment to one creditor in priority to other creditors of the same class. For example, if a Company were to pay off a key supplier in full shortly before liquidation but make no payment to HM Revenue and Customs then the payment to the supplier could be challenged as a preference payment.

Insolvency Practitioners can challenge all preference payments which were made in the 6 month period immediately preceding formal insolvency and can challenge preference payments to connected parties made in the 2 year period prior to formal insolvency. Where a payment is to a connected party, it is automatically assumed that the Directors had the desire to prefer that creditor and so it is for the Directors to show that the payment wasn’t a preference if they are to have a defence.

The remedy for a preference payment is that the Directors or the beneficiary can be liable for an amount equal to the preference payment.

Other Courses of Action

There are numerous other courses of action available to Insolvency Practitioners but these are less common. These include:

• Fraudulent trading - occurs where a Company carries on business with the intent to purposefully defraud creditors. This is a criminal offence that can result in fines, penalties equal to the losses caused by the fraud and imprisonment. The key difference between this and wrongful trading is intent.
• Extortionate credit transactions - are transactions under which a Company has been charged an unfairly high rate of interest or charges, usually as a result of its distressed financial position. These can be challednged by an Insolvency Practitioner but such action is rare.
• Granting invalid floating charges - where a Company grants a floating charge in the 12 months prior to Liquidation, the floating charge is only valid in respect of any funds advanced or goods and services provided at the same time as or after creation of the charge. The floating charge would be held to be invaild in respect of any liability incurred prior to the granting of the floating charge.
• Phoenix company wrongdoing - the majority of UK companies that fail do not do so because of any wrongdoing on the part of the Directors. As such, UK law allows owners and Directors of insolvent companies to carry on similar business as long as they are not disqualified or bankrupt. The only automatic restriction concerns reuse of the Company name. You can read more on our dedicated pages about Being a Director Again and about Reusing a Company Name.

How We Help

If your Company is experiencing financial difficulties you are likely to be under pressure from creditors and may be beginning to suffer with the stress of the situation. In these circumstances, finding supportive and well structured advice as soon as possible ensures that you have the maximum number of options available and can also go some way to alleviating some of the pressure you are under.

At The Insolvency Helpdesk, we aim to provide you with online access to the information you need to understand your duties as a Director and the potential pitfalls to be aware of. You can then call us for advice specific to your business circumstances in the knowledge that you will better understand these options and the advice given. We operate throughout the UK and all advice is provided by Licensed Insolvency Practitioners with years of practical experience.

Whatever your situation, getting high quality professional advice as soon as possible will give you the knowledge and support needed to help you meet your statutory duties as a Director. We will always work with you to help you achieve the best outcome you can in the most affordable way possible so please call us free on 0800 066 3122