When Things Go Wrong

Murphy’s Law (or one version of it) states "whatever can go wrongwill go wrong" and that can appear to be the case when you are running a business in the current environment.  If it’s not a lockdown, it’s a shortage of supply, or it’s a major client failing, or it’s another of the myriad of things that can go wrong. 

While having good contingency plans in place, including cash reserves or access to a fighting fund, can help your business get through the hard times, when these problems come at you one after another in quick succession, things can turn to custard very quickly. 

When that happens, there are things that, as a director of the company, you should be doing and, equally as important, things that you shouldn’t be doing. 

What to Do:

The first thing to do, when you have run out of ideas on what can be done to rescue your business, is to seek professional advice.  Sometimes, all it needs is for someone who has the required expertise and experience and is one step back from the frontline, to look at what is happening and come up with viable rescue options.  These could include –

  • A compromise with creditors in which the creditor agrees to receiving an agreed percentage of the amount owed to them, with the balance written off, allowing the company to continue trading.
  • A Hive-down which transfers the valuable or profitable parts of a failing business to a new entity with the market value of the assets transferred paid to the failing business for the benefit of its creditors.

Consider your duties as a director of the company – to act in the best interests of the company or, if the company is insolvent, to consider the interests of the creditors. Take steps to ensure that you don’t allow the company to continue operating if it is going to increase the risk to creditors of the company.

What Not to Do:

Don’t put your head in the sand and decide that the only option is to keep working harder in the hope that things will come right in the long run.  All you may be doing is digging the hole deeper.

Don’t put your personal interests ahead of those of the company or its creditors. 

  • It is not a legitimate transaction to move all of the assets out of the failing company into your own name, or into the name of a new company that you have set up, without making payment to the failing company of the true market value of the assets moved.
  • It is not appropriate to use company funds to repay yourself, for unsecured funds advanced to the company, ahead of making payment to the company’s other creditors such as the employees, IRD and trade suppliers. 
  • Do not continue to operate the company so that you can repay creditors who may have a personal guarantee from you but, at the same time, increase the amount that is owed to other creditors.

If liquidators are appointed to the company, either by the shareholders or by the High Court, the liquidators will look at the steps you have taken, as director, and consider how your actions have impacted on the creditors.

If you took actions that were to the detriment of the creditors, you may be held personally liable for the losses they incurred.

Conclusion:

The failure of the company may not have been as a result of anything that you did, or didn’t, do, but your actions once the issues have arisen can have a marked effect on the outcome for creditors and on any personal liability you may face.

As soon as you identify that your company is, or will become, insolvent, you need to get the professional advice required and take the appropriate actions required of you as a director. 

If your company is facing solvency issues, please contact one of the team at McDonald Vague for a free initial discussion about your company and the options available.

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