Directors can take practical steps to address corporate insolvency

By CAROLINE MADDEN
Irish Times
10/07/2009

If business owners behave in an honest and responsible manner, they can safeguard their interests, writes CAROLINE MADDEN

THE LATEST figures on corporate failures make for worrying reading, particularly if you’re a director of a business that’s barely keeping its head above water.
According to Dublin credit bureau BusinessPro, which publishes Stubbs Gazette, over 300 firms went out of business due to insolvency in the first half of the year. However, directors can take practical steps to safeguard their interests when facing insolvency.

    Act honestly and responsibly
    The extent to which a director acts honestly and responsibly in relation to the affairs of the company is of paramount importance when a court is deciding if it traded recklessly (see step three below).
    Keep abreast of the company’s financial situation
    Directors should be armed with accurate financial information about the company’s affairs so they can exercise their business judgment as to whether or not it has reached a point where there is no prospect of recovery. If this point is reached, directors should take steps to wind it up.
    Avoid trading recklessly
    If directors continue to trade after the point when it ceases to be reasonable to expect an upturn in the company’s fortunes, then they are trading recklessly. This will be taken into account by a court in deciding whether to place a director under a restriction order. The reckless trading provisions do not apply during a period when a company is under the protection of the court, for example, if it is in examinership.
    Trade through a temporary dip
    If a business goes through a temporary dip in its fortunes, the directors will not be liable for reckless trading if they honestly and reasonably believe the company will continue to trade successfully after a brief interval during which it is technically insolvent.
    Incur no further credit
    If the directors wish to continue to trade while insolvent, the safest course of action is to avoid racking up further credit or reducing the assets of the company. The continuation of trading in this situation can only be justified if it is likely to protect, or increase, the assets which would be available to creditors in the event of liquidation.
    Seek competent outside advice
    Directors should not assume the safest action is to stop trading. A director can be faulted for both the premature cessation of trading and for continuing to trade while insolvent. Therefore it is advisable to seek competent external advice.
    Request a business review
    If the business is viable, directors should request a qualified professional to prepare a constructive business review to reduce expenditure, ensure adequate cashflow and restore the company to profitable trading. This may involve disposing of unprofitable or marginal parts of the business and reducing the company’s workforce.
    Keep proper accounts
    Directors should ensure the board regularly receives full and accurate updates on the trading and financial position of the business. Where there is a failure to keep proper books of account, the Companies Act 1990 provides that personal liability can be imposed on any officer in default.
    Hold regular board meetings
    Directors should insist on frequent board meetings and ensure there is a proper distribution of responsibility throughout the company. They should also insist that all recommendations they make for remedial action, as well as their dissent from unwise actions or inactivity advocated are fully minuted.
    Keep creditors informed
    Directors should keep major creditors informed and enlist their support for the operation of the company where this is likely to benefit them. It is important to have the support of major unsecured creditors, as well as secured creditors, as they are more likely to suffer loss. Their support will make it easier for directors to demonstrate subsequently that they took every step to minimise that loss.