Financial setbacks can affect any business, especially in challenging economic times. As a director, it is essential to understand the risks and liabilities associated with (impending) bankruptcy. Below, we share a checklist to help you navigate your business through difficult times and avoid personal liability.
Why this checklist is important for directors
Bankruptcy can lead to director liability more quickly than you might think. According to the law, even poor administration or late submission of annual accounts can be considered improper management. This checklist helps you identify the risks and take proactive steps to strengthen your position as a director.
Important questions you should ask yourself as a director
The following questions will help you identify potential risks. Questions that you cannot answer ‘yes’ to are areas of concern that need to be addressed in order to reduce the risk of liability.
Formalities for incorporation
- Was the company established more than a year ago?
- If shorter, liability is assumed more quickly.
- Were legal acts prior to incorporation explicitly entered into on behalf of the company being incorporated and subsequently ratified?
Capital and Distributions to Shareholders
- Has the issued share capital been paid up in full?
- Has the board approved distributions of profits or reserves (distribution test)?
- Has a balance test been carried out to check whether payments are possible?
Accounting and Annual Accounts Obligation
- Is the administration up to date and complete?
- Have the annual accounts been finalised and published on time?
Governance Structure and Decision-Making
- Is there no actual director without a formal appointment?
- Is the supervisory board informed in a timely and accurate manner?
- Are decisions taken and recorded in accordance with legal and statutory requirements?
- Have conflicting interests been taken into account and dealt with appropriately?
Proper Governance and Risk Management
- Are transactions between directors and the company recorded in writing (e.g. employment contracts, loans)?
- Has timely notification been given of inability to pay taxes and pensions?
- Have any agreements been entered into that are known to be impossible to fulfil?
Action points to prevent directors’ liability
Check your Administration
- Ensure correct registration in the Commercial Register.
- Keep accurate records of board decisions, including the minutes of shareholders’ meetings.
Review Contracts and Obligations
- Review which contracts can be terminated or renegotiated.
- Arrange payment plans with creditors.
Consider Reorganisation or Restart
- Investigate the possibilities for a reorganisation or restart.
- Ensure timely communication with key stakeholders.
Beware of Risky Situations
- Selective Payment of Creditors: This may be considered improper administration.
- Non-mandatory payments to shareholders: Payments during financial difficulties may be unlawful.
- Abuse in bankruptcy petitions: Under certain circumstances, filing for bankruptcy may be considered an abuse of the system.
Conclusion
Navigating financial difficulties requires you, as a director, to act with care and proactivity. By using this checklist, you will be better prepared to identify risks and take steps to avoid liability.
If you have any questions or require advice regarding the above, please contact us.
