Per ARKle Insight
Tuesday, 4 March 2014
Posted by Mark Sargent at 07:45
In Whose Best Interests Is The Company Being Run?
Should a company be run in the interests of the employees?
Or of the banks?
Or Her Majesty’s Revenue and Customs?
Or someone else perhaps?
In fact the situation itself dictates in whose best interests the Directors are required to run a business. In the ordinary course of affairs, Directors are obliged to run a business in the best interests of its shareholders. That is to say the decisions they make should maximise the returns to shareholders after meeting all the other obligations of the business, like paying creditors and taxes.
When things are not going so well, the situation changes. Insolvency practitioners apply two tests to a business to decide whether or not it is solvent. The first is cash flow: can the business pay its debts when they fall due? The second is the balance sheet: when all the assets and liabilities are totalled up, is the balance sheet positive or negative? If the company falls short in either case it’s technically insolvent, and the IP is likely to suggest administration or liquidation as the remedy.
However, did you know that a company can continue to trade while insolvent? Well in fact it can. What changes is the obligation of the Directors, which switches from the best interests of the shareholders to those of the creditors. So long as the directors can demonstrate that a company continuing to trade is in the best interests of creditors.
So all is not lost, just because the balance sheet fell the wrong side of positive for a while, or because there wasn’t the cash in the business that you hoped there would be. Just work prudently, diligently and fairly to improve the position of each creditor and you might well be able to trade through. Good luck!