What Should Directors Do When a Company Faces Financial Difficulties?
Published by Averycorp Corporate Advisory · 6 minute read
When a company starts to struggle, the instinct is to trade through it quietly. That instinct is understandable, and it is usually the point at which options begin to close.
The duty shifts before the company fails
Directors owe their duties to the company. Once a company is, or is likely to become, unable to pay its debts, those duties must be exercised with regard to the interests of creditors. The company has not failed at that point — but the standard against which decisions are judged has already changed.
This is the part most directors are not warned about, and it is why the timing of advice matters more than its volume.
What to do first
Establish the financial position properly rather than approximately. A clear view of cash flow, obligations and security arrangements is what every subsequent decision depends on.
- Get an accurate, current picture of cash flow and liabilities
- Identify which obligations are secured and which are personally guaranteed
- Record the basis for significant decisions as you make them
- Avoid incurring new credit you may not be able to repay
- Take professional advice before, not after, the position deteriorates
Where directors get exposed
Exposure usually comes from continuing to trade without a reasonable basis for believing the position will improve, from transactions that prefer one creditor over others, and from decisions taken without a documented rationale. None of these require bad intent.
The practical takeaway
Early advice widens the range of options and narrows personal exposure. Both effects work in the same direction, and both weaken the longer the position is left.
- Duties shift towards creditors before the company actually fails
- An accurate financial picture precedes every other decision
- Document the reasoning behind significant decisions
- Exposure rarely requires bad intent — only delay
Is this your situation?
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