Directors’ duties in turbulent times

James Houghton, an Associate in our Restructuring & Insolvency team at Hay & Kilner, explains how directors can identify signs of financial distress.

Many businesses in the region have seen their bottom line impacted over the last few years by factors such as the pandemic, rising interest rates and energy prices. Naturally, it is the responsibility of the directors to make the necessary decisions to mitigate against these pressures and support the continued trading of their businesses. Therefore, as a director in a business that is facing turbulent times, it’s vital to understand your duties and know when to call in expert help.

Spot the warning signs
The ability to detect early warnings of financial distress can mean the difference between recovery and failure. It is therefore critical you act early and seek advice if your business is struggling or you think cash flow might be squeezed in the coming months. Because the earlier you act, the more options you will have to secure the business’s long-term survival.

Don’t bury your head in the sand!
How you engage with creditors can also make a big difference to the final outcome. Be upfront and offer achievable solutions to your creditors. Overpromising, misleading and ignoring creditors will make them more likely to work against you than with you.

Document your decisions
When facing financial difficulties, you should ensure you hold regular board meetings with your fellow directors to discuss the situation and provide full board minutes that explain the rationale behind any decisions you take. If you are a sole director, you can record your rationale in the form of a written director’s resolution.

Seek financial advice
It is also important to seek independent financial advice to understand the severity of your business’ financial problems. If you instruct an insolvency practitioner, they can review the existing financial information and assist you with preparing additional important information such as cash flow forecasts. They will also be able to discuss your options, including the insolvency processes that may be appropriate for your business should this route become necessary.

Seek legal advice
In addition to financial advice, if you are concerned about the prospect of insolvency, you may wish to take legal advice as to the nature of your legal duties. While you may already be aware of your legal duties, the prospect of insolvency can alter the scope of these duties, so it is important that you take advice on this.

It can be tempting to simply resign as a director in the face of financial difficulties, but that does not guarantee protection and could have opposite implications.

At Hay & Kilner, we offer a range of insolvency and restructuring legal advice. Among other things, we can advise individual directors on their legal duties, act for companies in negotiations with their creditors and advise on the various corporate insolvency processes.

Need help?
Our friendly and experienced team are happy to help, so if you are experiencing any challenges or concerns, please feel free to contact us.