Role of a Director in a Trading Insolvent Company.
As the financial conditions of a limited company start dwindling, the director has to be more vigilant and proactive to try and bring the Company’s performance at par with the shareholders’ expectations. If the company continually fails to meet the financial expectations then it can be deemed as operating in the state of insolvency. Carrying out trading activities in such a company is unlawful in the number of legal systems. Legal regulations enforce the director-of a trading insolvent company to carry out certain duties.
Failing to steer the company in the right direction when it is facing financial issues can lead to the director accused of being willful. As a-director of a trading insolvent company take the responsibility to bring the company back on the track as defined in the company’s annual financial goals. Initiating the processes that will help in repayment of the outstanding debts is a good first step. A director is legally responsible-for ensuring that-the company takes-the steps necessary-to repay outstanding debts.
Act in-the best interest of Creditors
The director of a trading insolvent company has to act-in the best-interest of-the creditors.A director is not allowed to favour any single creditor and needs to cater all the company’s creditors as-a whole. Entering new contracts without any intention to repay old creditors will be considered
as an act of wrongful-trading. A director needs to ensure that dishonest transactions should not be carried out and every action should in some way or the other reflectthe company’s intention to pay back its creditors. A director should never ignore a creditors’request and acknowledge it with reasonable answers and acceptable timelines.
Chart a repayment plan
The director can follow restructuring, cutting down of avoidable costs and not enter into-new contracts while the old creditors are fully repaid. A clear timeline of the activities that are to be carried out should be prepared and shared with the creditors so that they are aware of the proceedings.
Keep the board aware
Keeping the board aware of all the ongoing proceedings is very important for a trading insolvent company, the directors can keep records in the minute book with the details that are shared with the board with all possible steps to be taken to cater its pending creditors.
What are the possible penalties?
Continuing the operations in a trading insolvent company ranges from civic penalties to criminal charges. The directors may also be made personally liable if wrongful trading is proven. Directors who continue operations may be disqualified if their company is trading insolvent.
Final Point to Remember
Be honest in carrying out your duties and diligently try and pull the company out of the financial stress. Act sensibly, reasonably and responsibly.