Directors of failing companies need to roll up their sleeves rather than resign when trading gets tough, according to legal and insolvency experts.

They also warn shareholders that directors are obliged to have regard to the competing interests of creditors during restructurings.

Radford Goodman, a corporate restructuring and insolvency partner at Norton Rose, the commercial law firm, says directors who realise their companies are in trouble need to consider creditors’ interests to avoid later legal challenges. Among his recommendations are:

(1) Directors should minute their thoughts to show that they attempted to apply good judgment during periods of difficult trading;

(2) They should ensure that they have access to up-to-date information on accounts so they can show decisions and judgments were based on good management information.

The main danger is to remain “blindly optimistic...stick their heads in the sand”, fail to take outside advice and recklessly attempt to trade their way out of difficulties.

Executive and non-executive directors have an equal duty to ensure that all stakeholders are considered properly – though directors facing distressed situations can legitimately continue to trade if they fairly believe it is the best route to minimise losses to creditors, he says.

Mr Goodman adds that directors of distressed companies should resist the temptation to resign when the going gets tough.

Successful prosecutions of directors for wrongful trading are rare, but the courts may take a dim view of those who prematurely depart.

And the development of third-party litigation funding by investors such as hedge funds is also becoming more common.

But resignation may be an appropriate course to avoid conflicts of interest or where they find themselves in a minority on a board with which they disagree.

In such situations, they should ensure their reasoning is clearly documented and minuted.

Peter Joyce, director-general of the Insolvency Practitioners Association, warns of “choppy waters” ahead, but says the “maturity” of shareholder and bondholders will help avoid viable companies being unnecessarily put into administration.

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