The Companies Act 1993 imposes a duty on directors not to allow "the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors." This is commonly known as "reckless trading" and a breach of this duty can expose directors to the risk of personal liability if the company ultimately fails. Directors are also under a duty to
ensure that proper accounting records are kept and failure to keep
proper records can also result in a liquidator seeking orders from the
High Court for directors to contribute to the debts of the company.
It is therefore vital that directors take an active part in the management of the company and, in particular, that they regularly monitor the financial performance of the company. Ignorance of the company's financial position is no excuse. The courts have emphasised that directors should hold regular directors' meetings and ensure that minutes of those meetings are kept. If a structured process to directors' meetings is adopted from the outset then this will help directors to keep tabs on management and identify financial problems at an early stage.
Directors are often reluctatnt to seek professional advice, partly because they often hope that things will get better, and partly because they are concerned about the potential cost. However, an experienced insolvency practitioner should be able to quickly make an assessment of the company's financial position and help provide advice as to whether directors should continue or cease trading.
