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Top tips for financiers: directors in a financial crisis

It is not unlawful in itself for a company to trade when insolvent. To avoid personal liability for any increase in deficit, directors should not cause the company to trade on once they know or ought to conclude that it cannot avoid an insolvent liquidation — unless they then take every step with a view to minimising the loss to creditors. Any activity that depletes the assets available for creditors can amount to ‘wrongful trading’ for which the directors could be personally liable.

It is important to note that every step must be taken if the above applies; usually this includes a block on non-essential payments and the incurring of new credit, in favour only of those payments or obligations critical to the company’s current survival plan.

Shadow directors can be made liable for the deficit caused by wrongful trading. The directors must be in the habit of deferring to the shadow director for instruction on what to do. A financier imposing requirements for its own protection, as a condition of continued finance, should have nothing to fear. A written record may help…

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