This recession seems to be going on forever and there are no real signs of economic improvement at the moment. Sadly, this means more businesses are likely to fail during the coming months and it is more vital than ever that directors understand their responsibilities and take action to protect their company and personal liabilities.
 

The company
When faced with difficult times, every business should consider doing the following:

• Review existing borrowing to ensure it does not breach the terms of your facility
• Ensure budget and business plans are realistic in light of current economic conditions
• Monitor your financial position closely and build up sufficient cash reserves for both the long and short terms
• Review existing arrangements with customers and suppliers to ensure they are financially healthy
• Hold regular board meetings at which all directors attend and take detailed minutes of decisions taken

The director
As a general rule, directors do not become responsible for the debts or obligations of the company. But if the business is in financial difficulty, you can incur personal liabilities in certain situations. 
   If you believe your business is in trouble, it is essential that you seek immediate external accountancy and legal advice. Non-executive directors should be aware that, other than employment issues, you are subject to the same duties and liabilities as executive directors.
   Matters to consider include:

• If the company is insolvent, or likely to become insolvent, you are obliged to act in the best interests of creditors, rather than shareholders
• You must use independent judgement to ensure that you avoid any situation that may conflict with the interests of the company
• All directors have a duty to act with reasonable care, skill and diligence, but if your company is on the brink of insolvency, you may be held to a higher standard
• Directors may acquire liability for company debts if they have entered into contracts in a personal capacity or they have given a personal guarantee. You should try to avoid doing this unless it is absolutely necessary
• A director of an insolvent business may be disqualified from acting in this capacity again for between two and 15 years if he is deemed unfit to manage a company

The impact of insolvency
A liquidator can apply for a court order instructing the directors of insolvent companies to contribute to the assets if:

• Any money or property has been misapplied/retained by a director or if he has become accountable for it. In these cases, the court could instruct the director to repay, restore or account for the assets
• A director knowingly continued to trade with the intention of defrauding creditors
• Prior to the company going into liquidation, the director knew or should have known that there was no reasonable chance of avoiding insolvency, yet he failed to take every step to minimise the losses to creditors. This is called ‘wrongful trading.’ It is difficult to know when directors incur this obligation, which is why specialist advice is so important

   As this article demonstrates, there are many issues to take into account if your business is struggling. It is essential that you seek professional help at the earliest opportunity to protect yourself and your company.