Part 4: Early Options for Companies in Financial Difficulties and Director’s Duties

By Lucy Slatter

Principal Associate

T: 01279 712510
E: lslatter@nockolds.co.uk

Companies who find themselves in financial difficulties frequently end up taking advice far too late or only for the most urgent situations. This often means that only the more severe options are available, such as, liquidation or administration.  Liquidation is the formal process of converting a company’s assets to pay off its debts. Whereas, administration is often used to achieve a sale of the business as a going concern.  For companies who want to continue trading, they would usually prefer to avoid administration or liquidation but if advice isn’t taken early enough, these can be the only options available.   

Other options that a company may be able to exercise when they find themselves in financial difficulty are to enter into a moratorium or a company voluntary arrangement (CVA).  A moratorium prevents creditors from taking insolvency or legal proceedings against the company for 20 days or more, giving them some breathing space.  A CVA is a statutory compromise between a company and its unsecured creditors. Both are only available if the financial circumstances of the company are such that some debts can continue to be paid.  We have set out the main points of each one below.

Moratorium

  • The company must be able to pay certain debts, e.g., rent.
  • Creditors are prevented from commencing or continuing legal proceedings.
  • It gives breathing space to assist the company.
  • Usually, directors remain in control.
  • The directors must make a statement saying that the company will be unable to pay its debts and that the moratorium is likely to lead to the rescue of the business.
  • A moratorium gives a company time to restructure its liabilities.
  • It lasts for 20 days plus a further 20 if approved by the court.
  • An insolvency practitioner is appointed to monitor the company’s affairs.

Company voluntary arrangements

  • Statutory compromise between a company and its unsecured creditors.
  • The company proposes a restructuring plan to its creditors, which will be binding on the creditors if approved by the relevant majority.
  • Negotiations with secured creditors often run in parallel.
  • It will often lead to secured creditors being paid in full and unsecured creditors receiving a reduced sum but usually all creditors receive some payment.

Duties as a director

It is important that you are always mindful of your duties as a director. When facing insolvency, the duties shift from acting in the best interests of the company to acting in the best interests of the company’s creditors.

 As a director your duties include:

  • Acting within your powers.
  • Promoting the success of the company.
  • Exercising independent judgment.
  • Exercising reasonable skill, care and diligence.
  • Avoiding conflict of interests.
  • Refusing third party benefits if they are likely to create a benefit of interest as well as declaring any interest in transactions or arrangements.

Steps directors should take when they believe their company is in financial difficulty

  • Exercise their independent judgment.
  • Ensure they have up to date financial information.
  • Have regular board meetings.
  • Keep major creditors informed.
  • Be mindful of potential for conflicts of interest.
  • If there is no reasonable prospect of avoiding an insolvent liquidation, record that in the board minutes.

The most important takeaway from this article is that if you believe your company is in financial difficulty, or is likely to experience financial difficulty in the near future, explore available options early and above all be mindful of your duties as a director.  You should be aware of the potential for directors to become personally liable and the circumstances in which that could occur are explored here.

Should you wish to discuss anything mentioned in this series please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.