Guiding You Through... Guide For Directors Of A Company Facing Insolvency

DUTIES OF DIRECTORS OF A BVI COMPANY FACING INSOLVENCY

What should I do if I am a director of a company facing insolvency?

Directors of companies in financial difficulties need to make hard decisions regarding the management of the business of the company and the treatment of creditors. This note suggests a number of practical steps to be taken to minimise the risks which arise in these circumstances. This note is not comprehensive, and highlights only a few of the relevant factors.

As soon as a director becomes aware that the company is in financial difficulties, he should raise the problem with the board and the board must seek independent professional advice. The directors must take every step to minimise the potential losses to the company. Directors will be subject to penalties and required to compensate creditors for loss suffered as a result of trading the company when it becomes clear that there was no reasonable prospect of the company avoiding insolvency. A company must not continue to trade in these circumstances.

The aim of the insolvency legislation is to force directors to give careful consideration to the position of the company.

Directors would be well advised to take a cautious approach. If the company goes into insolvent liquidation, their actions will be scrutinised by the company's liquidator, and they may be called to account personally for the losses of the company.

Set out here is a list of dos and don'ts for directors in this situation:

Dos

Do obtain professional advice in relation to any major decision taken by the company.

Insist on any such advice being documented.

Do hold regular board meetings.

All directors should be present so the entire board is aware of the company's financial status.

Do circulate board minutes immediately after meetings.

The minutes will be evidence of whether or not the steps taken by the directors to minimise the potential loss for the company's creditors for the purpose of avoiding liability for insolvent trading.

Do draw up a list of all possible sources of funding for the company.

The board's attitude to pursuing any source of funding should be documented. The list will be useful for the board in identifying the time at which the company no longer had any reasonable prospect of avoiding insolvent liquidation for the purpose of avoiding liability for insolvent trading.

Do draw up a timetable by when financial milestones such as new funding levels for the company must be met.

...