Many business owners have faced challenges over the past year or so, as a consequence of the Covid-19 pandemic and other issues that have impacted upon the economy. Whilst the economy has now started to reopen and life gets back to normal, many business owners have found themselves with liabilities arising from the pandemic. In this article, we will look at how you can minimise any risk arising in this situation.
Directors’ Duties – what are they?
A director’s main role is to manage the interests of the shareholders, with their overriding duty being to maximise the wealth of the shareholders by promoting the success of the company. In many SME businesses, the directors and the shareholders can be the same person/people and so these duties will go unsaid – of course you are going to promote the success of your own company!
However, when you cannot pay creditors as and when they fall due (you may have had to agree repayment plans with certain creditors), this can be an indicator of financial distress. If, as directors, you find yourself in this position, you should start to think about minimising your potential losses as your duty as a director then swings from a focus on the shareholders of the company to the stakeholders as a whole.
I have payment plans in place – how do I manage that position?
When businesses get into difficulty, we often see directors making knee-jerk decisions, agreeing to pay people who shout the loudest. This is usually done without any thought as to who needs to be paid, leading to an increased reliance on short-term borrowing as cash is found to meet the following week’s payment run.
The easiest way to keep abreast of your ongoing financial position is by keeping your management information up to date and monitoring it using a cash flow forecast. Inputting your anticipated sales/income, as well as the expected and/or agreed payments will give you clarity on what needs to be paid and when, whilst also anticipating any potential pinch points. You should include any deferred liabilities within your cashflow forecast to make sure that they are not forgotten about.
What are the risks if I don’t do that?
Keeping on top of your financial position will help minimise any potential risks, including slipping into insolvency. Many business owners have found that they sleepwalk into an insolvency process as they weren’t fully aware of the extent of their financial problems. There are two main risks for you personally as a director if you subsequently enter insolvency – misfeasance (breach of your fiduciary duties as a director) and wrongful trading (allowing the company’s financial position to worsen when you knew, or ought to have known, that insolvent liquidation or Administration could not be avoided).
Both of these carry personal liabilities for directors, including a requirement for you to make a personal contribution to the loss incurred as a consequence of your actions.
How do I mitigate the risks?
There are a number of actions that you can take to mitigate any risks. Maintaining your cashflow forecast is a good start, and documenting your decisions is also a good piece of advice – taking contemporaneous file notes is much easier than trying to remember why you made a certain decision a few months later. Where you are looking at a cash shortfall, seek advice before taking out extra credit or further borrowings. If you want to dispose of any assets, make sure that those are carried out at arm’s length and for fair value (obtaining an independent valuation of the assets can assist with this). Finally, you should make sure that everyone is treated equally – do not prefer certain creditors over others, especially those where you might have provided a personal guarantee.
In summary
It can be a minefield trying to determine what you should do for the best as a director, especially when you are faced with competing priorities and an increasing number of challenges. Taking a step back and reminding yourself that you need to be acting in such a way as to promote the longer-term success of the business is often a good piece of advice, and using something tangible, like a cash flow forecast, to manage your position will help keep you on the right track.
That being said, if you do feel that the situation is starting to become challenging, having someone independent to take a look at the position can be really useful - tackling any issues early will give you and your business more options to resolve the challenges you are facing.
Our Restructuring and Insolvency Team can provide advice and support to help minimise the risks to your business.
