In the current economic climate more and more companies are finding themselves in financial difficulties and may face insolvency. Although the principal duty of the directors of a company is to promote the company's success, as a company approaches insolvency directors must also have regard to the interests of the company's creditors, as it is the creditors that are ultimately exposed by a company's failure. In order to focus directors' minds in such circumstances the law has created a number of situations where a director may be personally liable to contribute to the debts of the company. One such situation is wrongful trading. Wrongful trading will arise where the director knew or should have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation and yet continued to trade and exposed creditors to further loss. In order for a director to avoid either wittingly or unwittingly being responsible for wrongful trading, they should ensure that they have accurate and up-to-date financial information for their company and they should participate in regular board meetings at which the pressures of trading in the current climate can be assessed and addressed. If it becomes apparent that their company will not avoid insolvency, then the directors may have no other option than to place the company into an insolvency procedure. Directors should not simply resign as this removes their ability to comply with their duties and places them at greater risk of being pursued for wrongful trading. If they feel the conduct of other members of the board leaves them no option but to resign, then they should ensure that their resignation letter and, if possible, the board minutes set out their concerns. Being a director of a company facing insolvency involves walking a tightrope between practical concerns, personal emotions and legal directors duties and it is essential that directors are aware of their responsibilities and seek professional advice as early as possible should they have any concerns.
Ian Mitchell is an associate specialising in corporate finance law with leading UK law firm Shepherd and Wedderburn LLP.