Director’s responsibilities when a business is in trouble

Published by Vanessa Crosby on August 15, 2011

When a business is in trouble there will inevitably be tension between the completing rights and interests of the various stakeholders. Directors are often either driven to seek to save the business or to extract money that they have put into the business .

Some will shut their eyes with the hope that business will improve. This often leads to directors undertaking transactions immediately prior to liquidation without proper regard to the rights and interest of other stakeholders. Such transactions can create personal liabilities for directors and liability and loss for the counter-parties to the transactions undertaken. Accordingly while directors remain in control of the company and are considering options for dealing with a business in trouble the directors must understand and consider the competing rights and interests of the various stakeholders, their duties and what transactions they can legitimately undertake.

The following are examples of transactions that may be set aside by the liquidator:

  • Where the transaction was entered into when the company could not pay its due debts and it enabled the person to receive more towards the satisfaction of a debt that they would have received in the liquidation and the transaction was entered into within two years of the liquidation commencing. A transaction entered into within six months before the liquidation is presumed to be entered into when the company is unable to pay its due debts.
  • Subject to certain exceptions a charge may be set aside by the liquidator if the charge was given within two years of the liquidation commencing and immediately the charge was given the company was unable to pay its due debts.
  • A transaction at undervalue. A transaction is at undervalue if the value provided by the company is greater than the value received by the company under the transaction.

The following list sets out some of the directors duties in this situation. It is not exhaustive.

  • A director has a duty not to agree to, or cause or allow the business of the company to be carried on in a manner likely to create substantial risk of serious loss to the company’s creditors.
  • A director has a duty not to agree to, or cause or allow the business of the company to be carried on in a manner likely to create substantial risk of serious loss to the company’s creditors.

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