If a business is in trouble directors must make an early decision whether or not to cease trading or face investigation and possibly contribute personally to the company’s losses. Spiralling costs, loss of financial backing and tougher trading conditions make it hard for many directors to assess whether difficulties are a short term blip due to the credit crunch or a sign of deeper malaise in their particular company. In these uncertain times it directors must tread carefully.
Deciding whether or not to continue to trade can be difficult, but directors must ensure that there is a reasonable prospect that the company will avoid insolvent liquidation before being party to any decision to trade on. Under UK law if a company is trading when it is insolvent, a director may be liable for wrongful trading. The director must cease trading immediately and take steps to liquidate the company. Directors may escape liability for wrongful trading if they can prove adequate steps was taken to minimise the loss to creditors after it became apparent the company was insolvent.
Warning signs for Directors
Early action must be taken. Directors should meet regularly to discuss current events and possible problems. Accounting information, which must be accurate and up to date, must be used to assess day to day cash flow. Detailed records of meetings should be kept. Decisions to continue trading must be reviewed on a very regular basis and if there is any doubt about the viability of the business expert advice must be sought.
A sure sign of cash flow problems or other difficulties would be a County Court summons. Another clear signal is when the business can’t pay staff or there is an acute lack of working capital the business. Get help. A great place to start is the UK Insolvency Helpline, which will help identify the problem – whether it is management structure or collecting businesses debts or maybe instigate a full rescue package.
