Leading in challenging times: As a director, you are not a bystander
What difficult economic times mean for your responsibilities as a director
Economic conditions evolve continuously and sometimes call for heightened vigilance. When profit margins come under pressure, payment terms are extended or uncertainties mount, these are signals to which a director must respond alertly. The law expects you to take firm control: not only to identify problems, but also to address them proactively. Anyone who fails to intervene in a timely manner risks being held personally liable — directors’ liability is a concrete reality.
Which warning signs deserve your attention?
- Financial: persistent losses, negative cash flow or mounting debts.
- Operational: customers failing to pay, staff turnover or the loss of key suppliers.
- Strategic or legal: ongoing disputes, seizures or late filing of annual accounts.
When these signals occur, the law expects you, as a director, to take concrete action.
What does that mean in practical terms for you as a director?
Good governance involves more than simply monitoring day-to-day operations. The Companies and Associations Code expects you, as a director, to act proactively, to be able to justify your decisions and to intervene in a timely manner when necessary. In this regard, the law looks not only at results, but also at your approach.
Active monitoring and intervention
As a director, you are legally obliged to govern the company appropriately and to monitor its financial situation closely. In practical terms, this means: following up on customers who pay late or not at all and taking timely action; ensuring your own payments to suppliers are in order. Warning signs — such as a shrinking cash flow or mounting debts — must be discussed in good time within the governing body.
Legal obligations: not a formality, but an opportunity
When business continuity is under pressure, the law imposes a number of specific obligations on directors:
To meet in a timely manner as the board and take concrete measures to safeguard the company’s continuity for at least twelve months, which is also part of the alarm bell procedure. This is therefore a tool for making timely adjustments. Anyone who ignores these obligations or applies them too late risks incurring liability;
Report transparently and comprehensively on risks and uncertainties in your annual report or notes to the financial statements;
Explicitly justify the going concern assumption in the event of persistent losses or negative equity;
File your annual accounts in a timely manner (ongoing obligation) — failure to comply may even result in the court ordering the dissolution of the company.
Transparency is your strongest ally here. Your annual report or notes to the accounts must give a fair view of the risks and uncertainties facing your company. This builds trust with shareholders, banks and other partners and makes it easier to secure support when needed.
Liability: why minutes are your lifeline
Complying with these legal obligations is one thing — but good documentation is also your strongest personal safeguard. When the board decides as a body, joint and several liability generally applies: even those who had doubts but remained silent can be held liable. Anyone who has their objection recorded in writing in the minutes can avoid that liability. In other cases, such as where there is a sole director within the company, personal liability applies. Here too, recording specific decisions in the minutes is of crucial importance. Minutes are therefore not a mere formality, but your legal anchor.
In addition, there is another risk that directors sometimes underestimate. Anyone who continues to act whilst knowing — or ought to know — that the company can no longer pay its debts risks being held personally liable for the deficit in the event of bankruptcy. Again, document your decisions and the context in which they were taken.
What can you do today? Three concrete actions
- Focus on proactive follow-up and documentation. Ensure monthly or at least quarterly reporting that goes beyond the profit and loss account. Cash flow, outstanding receivables and liquidity are your true guiding principles. Document not only what was decided, but also why and on the basis of what information. If you disagree, have this recorded in the minutes.
- Take contractual precautions. Take a critical look at your contracts with customers and suppliers and ensure they contain a limitation of liability clause. A well-drafted clause not only protects your company but can also shield you, as a director, personally from claims.
- Consider directors’ and officers’ liability insurance. Such insurance protects your private assets against the financial consequences of a claim arising from a director’s error. Please note: serious intentional errors (fraud, wilful misconduct, deceit) are, in principle, excluded, but for most risks, a good policy provides a solid buffer.
Proactive governance: your best protection
Good governance does not require grand gestures, but consistency and forward thinking. Those who act proactively today protect themselves, their fellow directors and their company. It is worth discussing your position as a director with your adviser — even when everything is going well.
Economically challenging times put every entrepreneur and every director to the test. The law expects vigilance, proactivity and transparency – as the foundation of a healthy business. Seeking advice early on is always cheaper than taking action at a later stage – legally, financially and operationally.
Your situation as a director is unique. A discussion with your adviser at Deloitte will help you clearly identify your responsibilities and take targeted action — today, rather than waiting until it becomes necessary, by which time it may already be too late.
