Directors should prepare for business insolvency

Although the number of company insolvencies fell slightly in the third quarter of this year compared with the second quarter, company directors should keep abreast of their company's chances of insolvency.

The Insolvency Service revealed that there were 4,700 liquidations and 1,600 other types of corporate insolvencies (including businesses in receivership and businesses in administration) in the third quarter of 2009.

If a company is unable to avoid becoming insolvent, the conduct of the directors is likely to be reviewed. At the point of insolvency the duty of the directors changes from being for the benefit of the shareholders, to the benefit of the creditors.

If the directors are found to have continued trading despite the fact that they “knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation", then they may be liable for ‘wrongful trading.’

In order to avoid this liability, directors need to review their firm’s financial position at all times, while constantly being aware of the company’s chances of survival.

To reduce the chance of liability if their business should come into financial difficulties, directors need to identify problems at an early stage and always bear in mind that their ultimate goal is to limit potential losses for their creditors, not their shareholders.

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