A Director’s Duty to Creditors When Insolvency Is Approaching
When a company begins experiencing financial difficulty, directors face some of the most challenging decisions they will make in business.
A director’s focus normally sits with promoting the best interests of the company. However, when insolvency becomes a real possibility, directors must also consider the interests of creditors and take steps to ensure their decisions do not worsen the position of those creditors.
This can be a complex judgement call.
A company may be experiencing significant cash flow pressure, yet there may still be a realistic pathway to recovery. A temporary financial setback, new funding opportunity, restructure or improvement in trading conditions may mean continuing to trade is in the best interests of creditors.
Alternatively, continuing to trade without a reasonable prospect of recovery may increase creditor losses.
The key question is whether the directors’ decisions are reasonable, prudent and justifiable based on the information available at the time.
What Should Directors Consider When Insolvency Is a Possibility?
Directors should actively assess the company’s financial position and consider:
Ensure Financial Information Is Accurate and Current
Directors need reliable information to make informed decisions. This includes understanding:
- Current cash flow.
- Outstanding creditor obligations.
- Future income expectations.
- Available funding options.
- The company’s overall financial position.
Hold Regular Board Meetings and Document Decisions
Directors should ensure important discussions, decisions and reasons are properly recorded.
Good documentation demonstrates that directors have actively considered the company’s position and acted responsibly.
Obtain Professional Advice
Independent advice can provide valuable perspective and help directors understand:
- The company’s financial position.
- Available restructuring options.
- Potential risks.
- Director obligations.
Consider Whether Continuing to Trade Is Appropriate
Directors should regularly assess whether there is a realistic prospect of recovery or whether alternative options should be considered.
Explore Funding and Restructuring Options
Depending on the circumstances, options may include:
- Additional funding.
- Negotiated creditor arrangements.
- Restructuring operations.
- Selling parts of the business.
- A formal insolvency process.
Manage Cash Flow Carefully
Cash flow decisions become increasingly important when a company is under pressure.
Directors should carefully consider new commitments and ensure decisions are based on realistic expectations.
Early Advice Creates More Options
One of the biggest misconceptions about insolvency advice is that it is only required when a business has reached the point of failure.
In reality, early advice can often provide more opportunities.
Depending on the circumstances, options may include:
- Restructuring the business.
- Negotiating with creditors.
- Improving cash flow management.
- Selling the business or parts of the business.
- Developing a recovery plan.
- Considering formal insolvency options.
The earlier challenges are identified, the greater the opportunity to protect value and achieve the best possible outcome for stakeholders.
A Practical Approach to Insolvency Advice
At Pryde Accounting & Advisory Limited, we understand that financial difficulty is a challenging time for directors, employees, creditors and families.
Our role is not simply to manage formal insolvency appointments. We also provide practical advice to help directors understand their position, assess options and make informed decisions.
Hamish Pryde is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner, with experience advising businesses through financial challenges, restructuring and recovery.
Seeking advice early allows more options to be considered and gives stakeholders the best chance of achieving a positive outcome.
About the Author
Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.
Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited