In a turbulent and uncertain world, management teams need to be agile and responsive to rapidly changing trading conditions – locally and globally.
Whilst trading is good, the board’s main concerns centre around the success of the company for the benefit of its shareholders. When times get tough and cash is tight, however, directors are legally obliged to think much harder about their obligations to the company’s creditors and how best to protect their position. If directors get this wrong and the company fails, it can lead to personal liability for those directors. In extreme cases, as well as incurring financial penalties, this could mean disqualification from holding office as a director, or even criminal sanctions.
The main change stems from the duty to promote the success of the company. When a company is insolvent or bordering on insolvency, the duty to act for the benefit of the company’s members switches to a requirement to consider the interests of the company’s creditors, give them appropriate weight, and balance them against members’ interests where they may conflict. If a director breaches this duty, they may be required to contribute to the company’s assets on insolvency.
What do we do?
A company can get into financial difficulty in lots of different ways: perhaps they lose a key contract, or a main supplier lets them down, causing serious knock-on problems. Sometimes the causes can be more subtle, like a gradual erosion of market share, or accruing unmanageable fixed-cost overheads, or allowing the business to become over-leveraged.
Whatever the cause, we work closely with company boards to understand their individual situations and help identify the key stakeholders and their (sometimes competing) agendas.
We help by explaining the legal framework and the key factors that a board needs to take into account when formulating its strategy for rescuing the company. We explain the legal risks that the board faces and the additional duties that the directors owe to both members and creditors whilst continuing to trade through a period of financial distress. We help the board to put in place processes and procedures that are designed to align with discharging those duties and protecting their position, should the company ultimately fail.
We challenge boards to continually reassess the company’s performance against its preferred strategy and to critically re-evaluate whether that strategy is still appropriate in light of changing circumstances. We help boards to understand and formulate their contingency options, should their preferred strategy ultimately prove undeliverable. This can include formal restructuring and insolvency processes, such as administration, creditor agreements or (worst case) liquidation.
Beyond providing pure legal advice to the board, our hugely experienced team of sector experts bring a wealth of contacts and connections with key stakeholders such as financial institutions, insolvency practitioners, private equity houses and professional advisers. This network of deep and long-established market connections enables us to anticipate stakeholder concerns, provide invaluable insight into prevailing market practice and can greatly facilitate building better stakeholder relations by opening up clear lines of communication with key decision makers, to whom Gateley is a respected and trusted adviser.
Who do we help?
To avoid any liability, it is advisable for directors to obtain independent advice as soon as they become aware that the company is in financial difficulties. We provide governance advice to company secretaries, boards of directors and in-house lawyers on everything to do with directors’ duties while facing financial distress or an insolvency process.