Battling to save a failing business can put directors at risk

Company directors have been warned against soldiering on for too long trying to rescue a business which has no chance of survival as the recession deepens.

They could be accused of wrongful trading and run the risk of financial ruin as they become liable for the debts of their business – even if it is a limited liability company.

Peter Sutherland, of Andersons Solicitors in Nottingham says it is only natural that businesses want to ride out the current storm.

“The danger is that some directors fail to recognise or refuse to accept that their business has no chance of avoiding insolvency. They may have an emotional attachment to a firm they have set up themselves and feel a tremendous loyalty to their staff. Or they may be trying to avoid having to pay back company loans which they have personally guaranteed.

“This can carry on regardless, hoping against hope that things will improve even though that can sometimes just makes things worse.”

Peter says that as soon as a company becomes insolvent, directors have a legal duty to protect the interests of creditors. “When formal insolvency procedures get underway, the behaviour of directors over the previous few years could come under investigation.

“They could become liable for wrongful trading if it’s found that they continued entering into contracts or accepting credit after they knew or should have known there was no reasonable chance of avoiding insolvent liquidation.

“The court could then order them to use their personal assets to help settle the company’s debts.

“Directors of insolvent companies are also obliged to treat all creditors equally so they must not give preferential treatment to friends or a company that is threatening to sue them.”

Peter says the problem for many directors is identifying the point at which they become insolvent so they should seek professional help as soon as problems start to emerge.

“Persistence is a good quality in business but directors must also recognise when the cause may be lost and then make sure they meet their obligations.”

Peter Sutherland is a Partner in the Business law Department at Andersons Solicitors. He can be contacted on 0115 988 6714 or by emailing psutherland@andersonssolicitors.co.uk