Directors - don’t let a failing business drag you under
Published: 11 December 2017
Persistence is an admirable quality but unfortunately it can sometimes work against directors who take personal risks when trying to save a failing business.
the heart can rule the head.
often have an emotional attachment to a firm they have set up themselves and
feel a tremendous loyalty to their staff. This can blind them to the fact that
their business has no chance of avoiding insolvency.
it could just be down to money. For example, they may be trying to avoid having
to pay back company loans which they have personally guaranteed.
trouble is that if they soldier on too long trying to rescue a lost cause, they
could be accused of wrongful trading and face financial ruin as they become
liable for the debts of their business – even if it is a limited liability
soon as a company becomes insolvent, directors have a legal duty to protect the
interests of creditors. When formal insolvency procedures get underway, the
behaviour of directors over the previous few years could come under
could become liable for wrongful trading if it’s found that they continued
entering into contracts or accepting credit after they knew or should have
known there was no reasonable chance avoiding insolvent liquidation.
court could then order them to use their personal assets to help settle the
of insolvent companies are also obliged to treat all creditors equally, so they
must not give preferential treatment to friends or a company that is
threatening to sue them.
directors find it difficult to recognise or accept the point at which they
become insolvent, so they should seek professional help as soon as problems
start to emerge.
who run their business as a partnership could be even more at risk because they
could be personally liable for debts if their firm becomes insolvent. It can mean they not only lose the business they have spent years building up, they may also lose their personal savings and even their homes in some cases.
answer could be to consider restructuring the business as a Limited Liability
Partnership (LLP). There are several advantages to becoming an LLP – including
possible tax benefits - but the main one in the current economic climate is
that it helps to ensure that liability lies with the business itself rather
than with the individual partners.
personal assets of each partner should be protected in most circumstances if
the business fails, although they would still have to meet their other legal
responsibilities as we have seen, or they might still be liable.
also have a legal responsibility to take action if they discover that other
directors are acting fraudulently or dealing inappropriately with company funds
– an issue that could easily emerge as a business starts to fail. Failure to do
so could render them liable for subsequent losses.
contact Phil Downing in our Business, Corporate & Commercial Property Team if
you would like more information about the issues raised in this article or any
aspect of company law and directors’ duties.