Understanding Director Responsibilities During Financial Distress
Published by Averycorp Corporate Advisory · 6 minute read
Directors’ duties do not pause when a company comes under pressure. They shift — and the shift happens earlier, and matters more, than most directors expect.
The duty is owed to the company
In ordinary circumstances, directors act in the interests of the company, which in practice aligns closely with the interests of its members.
Once the company is, or is likely to become, unable to pay its debts, that alignment breaks. Directors must then have regard to the interests of creditors. The company has not failed at this point — but the standard against which decisions will later be judged has already changed.
What 'regard to creditors' interests' means in practice
It does not mean directors stop running the business, and it does not mean creditors take over decision-making.
It means that where a decision could reduce what creditors ultimately recover, that consequence has to be weighed and, ideally, recorded. Decisions that would be unremarkable in a solvent company can look very different when examined from the other side of an insolvency.
Three ways exposure typically arises
Personal exposure rarely follows from bad intent. It follows from three recognisable patterns:
- Continuing to trade without a reasonable basis for believing the position will improve
- Payments or transfers that put one creditor ahead of others
- Disposing of assets for less than they are worth
- In each case, the absence of a documented rationale makes the position considerably harder to defend
Practical safeguards
None of these are complicated, and all of them are easier to do before the position deteriorates than afterwards:
- Establish the financial position accurately, not approximately
- Record the reasoning behind significant decisions at the time you make them
- Identify which obligations are secured and which you have guaranteed personally
- Take advice at the point the question arises, not once it has been answered for you
- Duties shift towards creditors before the company actually fails
- Decisions normal in a solvent company can read differently in hindsight
- Exposure usually reflects delay and poor records, not bad intent
- Contemporaneous documentation is the most practical safeguard available
Is this your situation?
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What Should Directors Do When a Company Faces Financial Difficulties?
The point at which a company becomes unable to pay its debts changes what directors owe, and to whom.
Voluntary vs Compulsory Liquidation: What Is the Difference?
Both end in the company being wound up, but who initiates and controls the process differs substantially.
When Should You Seek Professional Insolvency Advice?
Earlier than most people do. The signals worth acting on are practical and easy to recognise.
Unsure Where the Line Sits?
A short conversation will establish whether your duties have shifted, and what follows if they have.