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What are a director’s duties when a company is struggling?

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As a director of a company, you will have many duties and responsibilities to uphold to ensure the running of the business is done seamlessly.

However, in times of financial difficulty for a company, your duties as a director are not only to be responsible for running your business, but also to be aware of your duties when it comes to insolvency and liquidation.

Failure to remain compliant with the expected responsibilities and duties of a director can lead to serious consequences and not only will you be letting your staff and customers down, but you could also face liability for debts of the company in the event of insolvency.

Below you’ll find some of the most important director duties that you should be aware of:

What are directors’ duties?

Directors’ duties were officially laid out for the first time under the Companies Act 2006 which included a list of detailed responsibilities that directors of a company are expected to maintain.

Making careful judgments

Applying your own judgment is an incredibly important part of your roles and responsibilities as a director. While of course, it’s perfectly acceptable to seek advice from others, the decisions relating to the business are yours first and foremost, so any final decisions that have to be made must come from you and not from someone telling you what they think you should do.

Determine whether the company is insolvent

If the director determines the company to be insolvent, then they must seek the appropriate legal advice in order to be made aware of the next steps involved in insolvency and if the company reaches the stage of liquidation, a director’s priorities must always remain with the creditors.

Avoid conflicts of interest at all times

As a director, you have a duty of care and a high level of responsibility to the company that you’re working for, but if you happen to be on the board of directors of two fairly similar companies, it can sometimes be hard to distinguish between the two and you could end up with a conflict of interest.

If you think that you’re able to be a director for multiple companies, it’s imperative that it’s not done with a conflict of interest and any potential conflict must be resolved immediately so that you don’t run the risk of impacting both businesses in any way.

Do not accept bribes

This point should go without saying but it’s important to reiterate anyway. Accepting bribes is not only bad for the company, but it can also be a criminal offence in some instances which leads to a whole lot of mess for both you as a director and the company.

Remain vigilant to always act in the company’s best interest

While one of the most important parts of a director’s role is to ensure that they act in the best interest of the business’ creditors, especially during insolvency, it’s also important that they act in the best interest of the company itself, along with other stakeholders such as staff, customers and suppliers.

The duties of a director listed above should be commonplace at all times during the running of a business, but they are particularly important to uphold in times of struggle.

In summary, some of the directors’ duties include:

  • Continually promoting the success of the business.
  • Making careful judgments and using their initiative about important decisions relating to the company.
  • Attempting to avoid all instances of conflict of interest where possible.
  • Not accepting bribes or favours from third parties.
  • Always remain vigilant and endeavour to act in the company’s best interests.
  • Exercise care and diligence when necessary.

During times of financial difficulty especially, such as during the time of the Covid-19 pandemic, there are several things that a director can do to ensure that they’re acting accordingly to their duties and responsibilities. Some of the things that a director can be expected to do during a particularly tricky time for business include:

  • Ensuring that they are acting in the best interest of the company and its stakeholders such as creditors, employees and suppliers and evaluating their own financial positions in accordance with the finances available to the business. For example, if you’re still paying yourself huge bonuses and pay cheques as a director, but the business is suffering financially and there are other areas where that money is needed more, it is your duty to claw back those bonuses to distribute accordingly.
  • Producing detailed accounts of the business’ finances in the form of balance sheets and cash flow statements to keep an eye on the business’ accounts.
  • When there is a meeting involving the directors, it is the duty of at least one board member to keep detailed minutes as a means of holding everyone accountable for the decisions made in each meeting.
  • Obtaining independent valuations when it comes to disposing of certain assets of the business.
  • Ensuring that each director is aware of their duties and roles and keeping everyone accountable for their actions.
  • Avoiding conflicts of interest where possible so as not to damage the business even further.
  • Ensuring that one creditor is not favoured more than another and monitoring the positions of creditors in general so that the business is able to pay the necessary creditors when needed.

If you’re a director of a company that’s facing insolvency, then it’s important to make yourself aware of all your additional responsibilities and if you’re worried about the potential consequences, ensure that you seek professional advice.

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