The UK’s Supreme Court has clarified a duty for directors relating to business insolvency.
The ruling says, “directors’ duties to creditors are triggered only when a company is either insolvent or on the brink of bankruptcy, rather than when the first signs of insolvency risks appear.”.
The ruling followed a bid by a debt collection company to get the law changed to force company directors to start taking creditors into account at the first risk of insolvency.
It clarified that the test is not merely when there is a real and not remote risk of insolvency. The trigger is now later.
It also said:
Directors must consider the interests of creditors when:
- the company is insolvent on a balance sheet basis or is unable to pay debts as and when they fall due and therefore insolvent on a cashflow basis.
- The company is bordering on insolvency
- insolvent liquidation or administration is probable
You can read the K2 Guide to Directors’ Duties for free here.