Page 27 - PWM2024_JULY-AUGUST EBOOK

TECHNOLOGY REPORT

Occasionally firms seek to enter into a detailed minutes to record the reasons for the directors’ decisions. “providing that they have a recovery plan
time to pay (TTP) arrangement, suggest- Such evidence, in Leader’s view, will be invaluable in defending in place and business forecasts that sup-
ing that the debtor is cashflow insolvent. against any future allegations of breach of duty. port the recovery plan showing that the
However, Leader sees TTP as “a crucial And Furniss backs this line. He highly recommends keeping position is forecast to improve”. To reit-
tool in overcoming short term cashflow “contemporaneous notes of all key financial decisions and the erate, without good advice, and where
difficulties without the need for formal rationale behind them, and avoiding doing anything that may precautions are not taken, if a company
insolvency proceedings.” worsen the financial position”. By this he means not incurring fur- subsequently enters liquidation (volun-
Taylor is of the same opinion. He ther debts or continuing to trade when there are no reasonable tary or compulsory), he says the “direc-
holds TTP as a simple reconfiguring of prospects of recovery, while also not paying selected creditors tors may be culpable of misconduct and
payment deadlines, “meaning that the over others, or selling assets at less than market rates. be the subject of a disqualification order
company will have more time to repay It goes without saying that if directors are in any doubt about of up to 15 years. In addition, the liquida-
the debt, allowing it an opportunity to what to do, they should seek professional advice – at the earliest tor may take recovery actions against
ensure it has sufficient assets to repay opportunity. Here Furniss suggests that once a director becomes them personally”.
the debt when it eventually becomes aware of serious financial problems, they should speak to the com- On a tangent, Leader cautions firms
due”. His point is that TTP is not neces- pany accountant who may then refer them to an insolvency prac- looking to raise funds that asset sales are
sarily a bad thing. titioner. He adds that “directors are, of course, at liberty to contact a particular area of risk. This is because,
Regardless, though, he notes that an insolvency practitioner IP for advice independently”. as he details, “in the event of an insol-
“there is no inflexible rule that a com- But as to where else to turn for guidance, Taylor mentions the vency, any sales of substantial assets that
pany should go into liquidation immedi- Business Advice Centre and the Federation of Small Businesses took place in the period before the com-
ately upon the directors deciding that it which offer help to struggling firms. He adds that “the company’s pany collapsed will inevitably be closely
is insolvent”. Rather, he says that “it is bank or lenders can also provide options to relieve, at least for a scrutinised and may be challenged”.
up to the directors to consider all the short time, cashflow issues”. Taylor expands on this, saying that
available options and to decide which selling or transferring assets at an under-
will best protect the interests of credi- Continuance of business value is prohibited by the Insolvency
Navigating choppy waters Director’s duties when a firm heads company can continue to trade. Here Leader says that they can “in assets have been transferred or sold at an
The obvious question at this juncture is whether an insolvent
tors”.
Act: “If a liquidator believes that the
appropriate circumstances, but it is risky”.
undervalue, to the disadvantage of credi-
for the buffers
And Taylor agrees, stating that “the risks of continuing to trade
When business is upbeat, the primary include wrongful or fraudulent trading, and/or misfeasance, tors, they can apply to the court to void
the transaction.”
duty of directors according to Taylor is to which is where a director is found guilty of breaching their fiduci- Furniss recommends that tangible
“promote the success of the company for ary duties”. He thinks it critical that directors recognise that the assets be valued by an independent valu-
the benefit of the shareholders and other actions they take while the company is insolvent will be fully scru- ation agent prior to sale. This is to avoid
stakeholders”. However, when storm tinised by a liquidator or administrator. any culpability which may result in dis-
clouds appear, with the potential for He cites section 214 of the Insolvency Act 1986, and says that “a qualification and/or recovery actions
insolvency, he warns that “the primary director can be personally liable to pay towards the assets of a against the director’s personal assets in
duty of the directors is to minimise the company if the director allows the company to continue trading at the event of liquidation.
losses of the company’s creditors”. As a a time, when the director knew (or ought to have known) that
result, directors should “not do anything there was no reasonable prospect of the company avoiding insol- CVAs as an option
in the course of trading that would be vent liquidation – this is known as ‘wrongful trading’.” He adds Even so, Taylor offers up a number of
deemed disadvantageous to creditors”. that if this is proven, directors can be held liable to “pay compen- options if directors for directors when a
In this situation Leader’s advice is sation equivalent to the estimated loss incurred by the company, company becomes insolvent. He says
clear: directors need to consider their calculated from the point that the directors knew, or ought to have that directors can put the company into
actions very carefully, particularly in concluded, the insolvency of the company to the point of formal administration, or liquidate it which
regard to the effect of their decisions on insolvency.” entails ‘winding-up’ – this results in the
creditors. He says this because if direc- However, Leader reckons that where directors have good rea- company being closed down and its
tors “don’t take proper account of the son to believe that a period of cashflow insolvency is only tempo- assets sold/distributed to creditors. They
can also contact the company’s creditors
interests of creditors, they will be at risk rary, it may be in everyone’s interests that the company trades on to see if they can meet an informal agree-
of personal liability if the company does to restore itself to solvency. In fact, he reckons that “to liquidate ment, or enter the company into a com-
fail”. the company in those circumstances might be highly value- pany voluntary agreement (CVA).
Good corporate governance is critical. destructive for all stakeholders. However, directors should ensure And this isn’t such a bad move per se
However informal management may that their projections are realistic and, if they are not sure or if the says Leader as “it can be a useful tool for
have been in the past, once a company problems are not merely temporary, they speak to an insolvency managing financial distress and achiev-
encounters financial distress it should practitioner so as to decide how to proceed.” Likewise, Furniss ing a better outcome for all stakehold-
hold regular board meetings and prepare sees no reason why an insolvent company can’t continue to trade ers”.

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