The best way for directors of a limited company to protect their assets is to make sure that the business is well-managed and that they and their fellow directors fulfil their obligations under the Companies Act. This includes:
- Making every effort to make the company successful by making sound decisions and using their expertise, skills, judgement and personal drive to make the business profitable;
- Keeping to the rules set out in the company’s Articles of Association;
- Not making decisions designed to secure personal gain for themselves over the best interests of the business;
- Being transparent with shareholders and fellow directors if they will profit personally from a legitimate business decision; and
- Meeting the deadlines for lodging company accounts and other documents with Companies House, and for submitting tax and VAT returns and meeting liabilities on time.
Whilst company directors may delegate responsibility for managing the business on a day to day basis to senior employees, such as a Finance Manager, accountability ultimately rests with directors. One of the first things a director should do is to ensure that the business is well managed.
Have a proper management/accounting system in place
Directors should be free to do what they do best; promote the business, generate sales and ensure that customer needs are taken care of. This doesn’t mean they should take their eyes off the ball in relation to the company’s financial position. A proper accounting system will enable them to see quickly, and on a daily basis, how the business is doing. Should problems arise, they will be able to tackle them quickly before they become a serious threat.
Avoid cash flow problems
Many businesses have failed owing to insufficient cash flow. Directors should take steps to make sure that, so far as is possible, there is sufficient cash flow to meet business needs, perhaps by utilising remedies such as invoice factoring. This should negate any need to exhaust available credit facilities, such as overdrafts. Maxing these out carries the risk of telegraphing to banks and creditors that there are problems.
Run the business!
Strategic focus and forward planning are key elements in directorship. Problems should be anticipated and action taken. A director’s day should be full of tasks that add value; they should not major in the minor by involving themselves in paper shuffling and other mundane procedural tasks. Instead, directors should focus on areas where payback for the business is greatest, whilst also making sure all aspects are being well-managed and are operating efficiently. Decisions should only be made once all the evidence has been weighed and pros and cons considered.
Think carefully before injecting personal funds in to the business.
A director making cash injections into a successful business which has a temporary cash flow problem is in a very different situation to a director refusing to acknowledge the business is in trouble and trying to prop it up with personal resources. Should the problems worsen and the business become insolvent, the directors could lose any money they had put in.
Do not borrow money from one area to fund another
Using available credit to pay instalments on other
credit is a clear sign that the business is in trouble. Similarly,
moving funds that are meant for one part of the business, such as, for
example, a budget for financing the transport fleet, to another, such as
purchasing stock, is also likely to lead to trouble.
Consider setting up a new company
The business and assets of an insolvent company can be bought at market value by the owners of a new (phoenix) company which could include one or more directors of the old company. Under no circumstances should a director
move assets from the old company to the new without the agreement of the
Insolvency Practitioner or an independent valuation.
Work collectively with other directors
As a director of a company you should take steps to ensure that the Finance Director/Manager is competent and fully trustworthy. Nevertheless, it would be dangerous leaving it at that without being regularly updated on the company’s financial position and checking, through the governance system in place, to ensure that the situation is as reported. Directors should meet regularly, minutes should be kept and important decisions and the reasons behind them documented. Ignorance of the behaviour of another director is no defence should the business becomes insolvent.
Consider possible threats
The following list, which is not exhaustive, covers those parties which, in certain circumstances, could pose a threat to the company. Should the threat turn into litigation which the company lost, a Court Judgement ordering the company to pay substantial compensation or damages could result in insolvency. The list includes:
- Clients or customers of the business who want to sue for negligence or breach of contract;
- Clients that fail to pay for any reason (including their own insolvency)
- Attack by employees (strikes and stoppages)
- Fraud, internal or external; and
- Divorce and other relationship breakdowns.
Make sure you have enough insurance
Insurance offers good protection against many of the above. Directors should take professional advice on the different insurance products needed to significantly limit company liability and by doing so further protect their own
position. Products are likely to include:
- Public Liability Insurance;
- Key man insurance
- Professional Indemnity Insurance; and
- Directors and Officers Liability Insurance.
Directors and Officers Liability Insurance provides for defence costs and financial loss should a claim be brought against a director or officer of the company by a third party. Taking out such insurance should be one of the first considerations
of a director.
Don’t keep all the eggs in one basket
Although a company director already benefits from the limited liability status of the company, additional protection can come by dividing the assets of the business between different legal entities. For example, the intellectual copyright can be held by one company; the building by another; and the
trading element of the business a third.
Do not provide personal guarantees
Any type of finance, including business loans and overdrafts, can be difficult to obtain. A company director seeking such a product might be asked to personally guarantee repayment from their own personal assets or by securing their home. Should the business fail the director will have to either repay the loan or lose any asset on which it is secured.
Investigate lower risk ways of financing your
A director can raise funding for the business by taking on new investors through Lend-to-Save or Crowdfunding schemes. Although this may mean that the director or board loses some control of the business, there are no repayments to make and the risk lies with the investor. Invoice financing is another way of keeping working capital and cash flow healthy and does not pose a threat to personal assets
(unless a personal guarantee is given). Invoice Financing enables a business, for a small charge plus interest, to raise money on the basis of its outstanding invoices.
Get advice about Trusts
Directors could consider divesting themselves of
personal assets altogether by placing them in Trust. This is a complex
area and professional advice should be taken. Placing assets in a Trust
is by no means problem free, as legally the director would cease to own
them and the Trust could be challenged.