Are there circumstances in which directors must act in, or at least consider, the interests of the company’s creditors? The Supreme Court has addressed this question for the first time during a recent court case and provided a significant verdict for company directors.
In this article, Clayton & Brewill outlines director responsibility during the financial deterioration of a company and how they should support creditors at this time.
Directors normally have a duty to act in the interests of the company and for the benefit of its members as a whole. However, if a company is insolvent or nearing insolvency, this is no longer the case.
As the financial position of the company deteriorates, the shareholders’ interests decrease in importance, and those of creditors increase. Once insolvency is inevitable, the interests of creditors become paramount, and they fall under director responsibility.
Directors must stay informed during this time and provide creditors with as much information as they can. In order to do this, they must:
- Ensure they are told if cash reserves, or the asset base of the company, has been eroded such that creditors may or will not get paid when due.
- Provide reliable information about company finances.
- Maintain up-to-date accounting information (companies can instruct others to do this on their behalf, visit our accountancy page for more specialist advice).
- Have continued training about director responsibility and the penalties for failing to comply.
The underscoring of director responsibility is particularly important at a time of recession when many companies are feeling financial strain.