The moment things change
While a company is trading profitably, a director runs it for the shareholders. Once it cannot pay what it owes, the people with the real stake are the creditors, and decisions start to be judged on that basis instead.
Most directors cross that line without noticing. It is worth knowing where it is, because the decisions taken either side of it are looked at differently afterwards.
The decisions that matter
- Continuing to trade. Trading on in the hope things improve is normal and often right. Trading on when there is no realistic prospect of recovery is the one that causes problems.
- Choosing who to pay. Paying the supplier who shouts loudest, or the one whose debt you have personally guaranteed, is the transaction most likely to be unpicked later.
- Moving assets. Selling equipment, stock or a vehicle out of the company for less than it is worth can be reversed.
- Taking drawings. Money out through the loan account while the company is struggling builds a balance you will be asked to repay.
- Declaring dividends. Only payable out of real distributable profits. If the profits were not there, the dividends come back.
Four practical things to do
- Take advice early. The single biggest factor in how a director’s conduct is viewed afterwards is whether they got proper advice and acted on it. Early is cheap; late is not.
- Keep the paperwork. Minute the decisions, keep the forecasts you relied on, note why you did what you did. Contemporaneous records are worth more than any explanation given two years later.
- Keep the company’s books together. Whatever route the company takes, the records need to be complete and handed over. Missing records cause more trouble than bad numbers.
- Do not pay yourself ahead of creditors. Repaying your own loan account, or a guaranteed debt, before other creditors is the most closely examined thing a director can do.
Where we fit
We are accountants and corporate finance people, not lawyers or insolvency practitioners. We can tell you what your options look like commercially, get the compliance position straight, and arrange a sale where that is the right answer. For formal insolvency, or for legal advice on your own position, you need the appropriate professional, and we will say so.