Warning to directors – seek early advice on financial problems

It is an age old question – how long do you keep struggling with your financial difficulties before calling it a day? If you put the company into liquidation too soon and you’ll never know if you could have traded out of your financial problems. Likewise, if you leave it too long, you run the risk of being guilty of trading whilst insolvent. The answer, according to the Insolvency Service, appears to be 7 months, though the reality is unfortunately that it will depend on a variety of factors.

In the case in question, a director of a garage and MOT centre was disqualified for 7 years for trading to the detriment of the company’s creditors for just short of 7 months. During this period and despite the company’s clear insolvency, the director allowed the company to continue to trade and build up further liabilities in excess of £100k, including almost £90k to the Crown. Furthermore, the director personally benefitted during the period in question. This adds an element of abuse of his position of trust and will have increased the appropriate period of disqualification.

The short answer is that, as soon as a company hits financial difficulties, its directors should seek professional advice as to the options available as the directors’ obligations shift from the shareholders to the company’s creditors as soon as an insolvency situation arises. Burying heads in the sand or blindly hoping matters will miraculously turn themselves around are rarely the right option.

To discuss this or any other legal matter on a no obligation basis, contact Matthew Howat, Commercial and Dispute Resolution Partner, on 020 7884 9700 or email Matthew at matthew.howat@hasolicitors.co.uk.

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