Key principles of good corporate governance

• Monitor finances continuously: track liquidity, revenues, costs and forecasts. Act early; early intervention can be the difference between rescue and insolvency.
• Act proactively: as soon as equity or liquidity may become inadequate, discuss remedial action. Small adjustments made early can prevent larger problems later.
• Document everything: written resolutions and minutes for all material decisions. Systematic documentation demonstrates that the Board acted on the information available at the time.
• Avoid new high-risk obligations: do not incur significant new commitments unless the company can reasonably meet them. Acting recklessly when the company is already struggling can trigger personal liability.
• Communicate honestly: be open with key stakeholders (banks, key suppliers, employees) about the challenges but also convey that the Board has a plan. Do not conceal material information from contractual counterparts.
• Comply with the statutory duty to act: if equity becomes inadequate.
• Ensure implementation or accept the consequences: if owners will not or cannot implement the necessary measures, the Board must consider filing for bankruptcy in good time, or resigning, if prevented from acting soundly.

Ultimately, Board responsibility is real and extensive and in a crisis, it is far better to act early than to face criticism later for passivity.

Heightened responsibility in a crisis

Before a crisis arises, the Board should establish sound routines for financial reporting and oversight. When revenues fall and costs rise, liquidity management becomes critical. The Board must regularly assess whether both liquidity and equity are adequate; it is not sufficient to wait for the annual accounts. Realistic liquidity budgets should be prepared and monitored closely.

In practice, deciding how transparent to be externally is a difficult balancing act. Excessive openness about financial difficulties may alarm suppliers and creditors; withholding material information, however, may give rise to liability. It is particularly dangerous for the company to continue entering into contracts that the Board or management knows are unlikely to be fulfilled. The Board should communicate clearly about uncertainties when new contracts are entered into, without creating unnecessary alarm. The standard of care intensifies as the situation becomes more acute, because creditor and employee losses mount, and the law requires proactive action to avert insolvency.

Core duty: Sound equity and liquidity

The Board has a statutory obligation to ensure that the company at all times maintains equity and liquidity that is adequate given the risk and scale of the business. The Board must continuously monitor the company’s financial position. Where doubt arises as to whether the company’s capital is sufficient, the Board must act immediately.

If the Board concludes that equity is no longer adequate, or has been lost entirely, the statutory duty to act is triggered. The Board must promptly address the matter and convene a general meeting. At the general meeting, the Board must present a statement of the company’s financial position and propose measures to restore adequate equity. Typical measures include injecting new capital (for example, through a share issue or a subordinated loan from the owners) or reducing costs and liabilities (selling assets, discontinuing loss-making activities). If the Board cannot identify any realistic remedial measures, the law requires it to propose dissolution.

The general meeting is formally free to decide how to respond to the Board’s proposals. If the owners choose not to implement the necessary measures, the Board has discharged its duty by giving notice and proposing solutions. Board members who remain in office without being able to act soundly risk personal liability. Where insolvency is a fact, the Board must file for bankruptcy, or individual board members should consider resigning.

Board work and documentation in a crisis

It is essential that all decisions are carefully documented. Detailed board minutes can serve as critical evidence that the Board acted soundly and in a timely manner. If creditors or others later challenge the Board’s actions, minutes, written assessments and recorded decisions will be the Board’s best defence. All communication on material decisions within the board and between the Board and the owners should be made or confirmed in writing. Where necessary, the Board should engage external advisers, including auditors, accountants or lawyers.

Measures that may secure continued operations (alternatives to bankruptcy)

When a company faces serious financial difficulties, the Board should explore all available options to avoid bankruptcy. Measures to consider include:

• Strengthen liquidity: contact the company’s banks to explore additional credit facilities or overdraft arrangements.
• Owner contributions: explore whether existing shareholders can inject funds, by way of a short-term loan or a new share issue.
• Reduce costs quickly: review all costs. Consider temporary lay-offs, salary reductions and restructuring or scaling down operations.
• Negotiate with creditors: approach suppliers, landlords and other creditors to renegotiate payment terms, seek deferrals, instalment arrangements or partial settlements.
• Formal debt restructuring: if the above measures are insufficient, consider formal debt negotiations, either voluntarily (agreed directly with creditors without court involvement) or by way of a court-supervised reconstruction under the Norwegian Bankruptcy Act, which provides temporary protection from bankruptcy while a creditor-approved plan is negotiated. Legal assistance from a restructuring lawyer is essential.

Next steps

Navigating a financial crisis as a board member is one of the most demanding challenges in corporate life. Whether the issue is a sudden liquidity shortfall, deteriorating equity, or the need to restructure debt, getting the right legal advice early can be the difference between rescuing the business and facing personal liability.

If your company is facing financial challenges, or if you are a board member who is uncertain about your obligations, contact us today for an informal chat.