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Director duties in periods of financial uncertainty

It would appear that the only certainty in the current pre-Brexit, politically paralysed climate is uncertainty itself. In the short term the consensus view is that business owners and directors can expect to have to navigate an economic landscape that may change with whatever headline comes out of Brussels, London, Washington, or indeed Stormont.

For directors of a limited liability company, responsibility for the financial affairs of their company falls to them irrespective of the events in the wider economy. Despite the limited liability status of the companies, directors are often surprised to learn that there are circumstances when a director can be held personally liable for the debts of the company.

Wrongful trading is one such circumstance, which arises if a company continues trading with no real prospect of the company avoiding insolvency.

It does not mean that a company should cease trading as soon as problems arise, but it does mean that directors need to recognise the signs which may indicate that the company may be facing financial difficulty.

Regular and reliable management accounts are fundamental to making those assessments. It is no longer acceptable for a director to wait for annual accounts, based on historical information, to be prepared by the external accountants or auditors in order to evaluate the company’s financial performance.

In addition to the management accounts, monthly financial information should also have a focus on the future and include projected information in a format that allows the directors to identify funding difficulties or problems which may be looming.

This financial information should allow the directors to consider the sales pipeline but also the overheads and costs. Typically budgeted profit and loss accounts, cash flow projections and balance sheets are prepared but one size does not fit all and the overriding consideration should be whether the information is sufficient for the scale and complexity of the underling business.

Like the economy, it is accepted that the only thing certain about projections is that the actual position will be different, but the value of the process is in understanding where and how the actual performance has deviated from the forecast and plans are adapted accordingly.

Typical warning signs include diminishing cash balances, breaching overdraft facilities and increasing creditor days, and should prompt directors into taking early action. If the position has reached the stage when the bank has stopped payments or statutory demands are being received, the options open to the director to rescue the company are more limited.

Any director who is concerned about the long term viability of their business should to seek professional advice from an insolvency practitioner on the options available - and the sooner the better. They should be careful to document the basis for their business decisions so that they can demonstrate that they have acted in the best interest of the business and defend against claims of wrongful trading should the business ultimately fail.