The decade-long consumer boom is over and the UK is left with a personal debt mountain of over £1.39trn, with individuals owing an average of £33,000.
A squeeze on credit has hit individuals and companies and the residential property market has slowed to a 30-year low. Allied to these problems are inflationary pressures on fuel, utilities and commodities.
The downturn will come as a shock to many after a decade of continuous growth but those with longer memories will recall how cycles of economic growth have inevitably led to recession. Businesses must adapt to changing conditions.
Business directors are subject to a barrage of obligations. Within this legally complex world of increasing regulation and scrutiny, a director must tread a careful path. Failure to fulfil duties can lead to civil and even criminal sanction, personal liability and disqualification as a director.
Case law has developed to the extent that directors cannot defend their actions on the basis that they held a genuine belief that the prosperity of the company could be restored by trading through difficulties.
A more objective standard is applied and directors will be punished if they have not acted with proper regard for the interest of creditors.
A director’s overriding duty can be distilled as the basic responsibility to act in good faith in a way likely to promote the success of the company for the benefit of its members. However, if insolvency of the company arises or becomes a possibility, the directors must have primary regard to the interest of creditors.
It is a difficult balance. The Insolvency Act 1986 imposes a duty on directors to take every step expected to be taken to minimise any loss to creditors from the moment a company cannot avoid insolvent liquidation. This does not necessarily mean that a director should cease trading as soon as a company becomes insolvent. Such a step may have disastrous consequences, causing additional loss to the creditors. For example, it may increase employee claims, destroy the goodwill of the business, leave client positions exposed and incur additional liabilities.
The directors should give careful thought to actions which may turn round the business, head off cashflow difficulties and return it to profitability. Steps to be considered may include:
Finally, the management should consider whether the structure and personnel of the existing board are best placed to bring a turn-round of the business.
Turning round a business requires a significant amount of time and effort. Perhaps new blood is needed. Those who have built the business and led it in a certain way might not be best placed to effect a change. Different skills sets are required.
In continuing to trade and trying to turn round a business, directors need to have regard to the proceedings that could be taken against them in circumstances where the company eventually enters into an insolvency process. Steps that should be taken to avoid potential personal liability may include:
Directors must be aware of the personal liabilities that can arise and the steps that can be taken to safeguard a company, its creditors and themselves. A three-step process should be taken:
Think about whether your business is strong enough to withstand a recessionary period.
Review all areas of your business. Are there steps that can be taken to improve its financial strength and avoid insolvency?
If the company is potentially heading into insolvency, seek out the advice of professionals.