As a company director, you bear a great deal of responsibility.
As a company director, you bear a great deal of responsibility.
As a director of a company, you bear a great deal of responsibility. Your decisions not only affect the success of the company, but can also have far-reaching personal consequences, especially when the company experiences financial difficulties. At Guldemond Lawyers, we have more than 25 years of experience guiding directors through complex financial situations. We understand the challenges you face and are ready to support you with expert advice.
Financial problems rarely arise overnight. Often there are subtle signs that a company is entering dire straits. Recognizing these signs in time is crucial to acting appropriately. For example, when customers stretch payment terms or suppliers become stricter in their terms, this may indicate underlying financial stresses. Internal complaints and problems, such as employees complaining more frequently about workload, overdue maintenance or other operational issues, can also be signals of deeper financial problems. Financial indicators deserve special attention. Declining margins, increasing inventories and rising accounts receivable are clear signs that the company’s financial health needs attention. As a director, it is essential not only to monitor these signals, but also to consider them in context and take appropriate action.
By law, as a director, you are required to perform your duties properly. This means that you must not only act carefully, but also be able to demonstrate that you have done so. In practice, this means that you regularly analyze, or have analyzed, the company’s financial position, carefully prepare and document important decisions, intervene in a timely manner when problems are identified, and act proactively. In addition, you should carefully weigh the interests of all stakeholders, such as shareholders, employees and creditors, and ensure sound and transparent accounting. Compliance with these obligations not only helps the company, but also protects you personally from potential liability risks.
The risk of personal liability for directors has increased in recent years. Administrators and creditors have become more active in holding directors accountable for financial problems. It is therefore critical to identify your personal risks. Start by taking stock of any personal guarantees and collateral you have provided to banks or suppliers. These, even after the company goes bankrupt, can still be recovered from you personally.
An effective way to limit your personal risks is to purchase a good directors’ liability insurance policy (D&O insurance). When purchasing or reviewing this insurance, pay attention to the legal assistance coverage; it is important that the insurance covers not only damages, but also the cost of legal assistance in defending against liability claims. In addition, check whether the insurance also covers runaway risks, so that events that occurred during your term of office but did not result in a claim until later are also covered.
To demonstrate that you as a director are “in control,” it is necessary to systematically monitor the company. This includes both financial and operational aspects. A monthly financial report is essential and should not only look back at the results, but also look ahead with forecasts. Important areas of focus are the development of working capital, the order book and expected turnover, margin developments by product group or division, the payment behavior of key customers and compliance with bank covenants. Financial problems often manifest themselves first in operational indicators. An increase in quality complaints, delays in delivery times, rising absenteeism and staff turnover, maintenance backlogs and the postponement of investments are signals that should be recognized early. By noticing these signals early, you can intervene quickly and prevent further escalation.
How decisions are made and recorded is very important. In case of legal proceedings, it will be judged whether you have acted carefully as a director. It is therefore essential to hold regular board meetings with a fixed agenda and thorough preparation. Keep careful minutes of these meetings, recording discussions, decisions and any objections made by directors. Engaging outside advisors when necessary, and documenting their advice and your follow-up to it, is also important. This documentation serves as evidence of your careful actions and can protect you from personal liability.
In times of financial uncertainty, managing relationships with stakeholders is a delicate balance. Transparent and timely communication is important, but hasty or careless communication can be damaging. Your relationship with banks and other financiers is crucial. It is wise to communicate financial challenges early and share realistic, validated forecasts. Work with financiers to find solutions, such as refinancing or modified terms. Make sure all communications are carefully documented. When financial difficulties arise, the interests of shareholders and the company may diverge. Consider what information you are required to share and at what time, whether shareholder approval is needed for certain decisions, and how to deal with shareholders who are also creditors.
The Internal Revenue Service occupies a special position in financial problems. Many directors’ liability cases stem from failure to properly fulfil tax obligations. If your company is unable to pay taxes or social security contributions, you are obliged to report this to the Internal Revenue Service in a timely manner. This notification must be made within 14 days of the due date of the tax assessment and include all relevant information on the cause and extent of the payment problems. By making the notification properly, you protect yourself from personal liability. With limited financial resources, you should carefully consider which payments to prioritise. In many cases, the IRS has a priority position. Acting incorrectly can lead to personal liability. It is important to be well aware of the legal priority rules with creditors, explore options for payment arrangements and avoid selective payments without just cause.
Your employees are an important asset of the company. It is essential to look after their interests and fulfil legal obligations. Decide when and how to inform the works council about the financial situation. Consider measures to retain and motivate key staff. Be open but careful in your communication to avoid unrest and speculation.
There are several options for dealing with financial problems. It is important to consider these options early and make strategic choices. An informal restructuring involves trying to reach a solution with key stakeholders outside of court. This may include renegotiating payment terms with creditors, raising new capital or refinancing, and implementing cost-saving measures and efficiencies within the company. Since 2021, the Homologation Private Arrangement Act (WHOA) allows for debt restructuring without the consent of all creditors. The benefits of the WHOA include preventing bankruptcy and preserving the company, flexibility in offering an agreement to different classes of creditors, and protection against enforcement action by creditors during the process.
Besides protecting the business, it is wise to pay attention to your personal financial situation. List your private assets and financial obligations. Consider whether your prenuptial agreement provides sufficient protection and whether adjustment is needed. Assess whether you can terminate or limit personal guarantees. Check whether your insurance policies are up to date and provide adequate coverage.
The timing of your actions may determine the success of the restructuring and your personal liability. Notify the tax authorities in a timely manner when payment delays occur to mitigate liability risks. Communicate proactively with banks when bank covenants are threatened to be breached in order to seek solutions together. Develop scenarios for different outcomes and prepare action plans.
For any potential development, it is wise to have an action plan. This plan should include a timeline with critical moments and deadlines, clear responsibilities within the management team, a communication plan for internal and external stakeholders, financial justification and risk analysis, and alternative strategies if the original plan proves unfeasible.
At Guldemond Lawyers, we understand the complexity of your situation. We offer preventive advice to identify risks early and develop strategies that can prevent or mitigate problems. We help you make informed choices, negotiate with stakeholders and implement restructuring plans. We also advise on legal obligations and support you in taking measures to minimise your personal liability. In acute situations, we are ready to act quickly and effectively.
Need advice or have any questions? If so, please contact Guldemond Advocaten.
