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Directors’ responsibilities in troubled companies

Directors' duties

Directors' duties can be onerous at the best of times. The general duties have been codified in the Companies Act 2006 and are summarised simply in the following Ministerial statement:

  1. Act in the company’s best interests taking everything you think relevant into account.
  2. Obey the company’s constitution and decisions taken under it.
  3. Be honest and remember that the company’s property belongs to it and not to you or its shareholders.
  4. Be diligent, careful and well informed about the company’s affairs. If you have any special skills or experience use them.
  5. Make sure the company keeps records of your decisions.
  6. Remember that you remain responsible for the work you give to others.
  7. Avoid situations where your interests conflict with those of the company. When in doubt disclose potential conflicts quickly.
  8. Seek external advice where necessary, particularly if the company is in financial difficulty.

Troubled companies

But things get more difficult if the company has financial problems.

Directors must recognise that when a company’s assets exceed its liabilities or it cannot pay its debts as they fall due, their primary duty ceases to be to the shareholders and the interests of creditors become paramount.

Failure to carry out his duties with the appropriate degree of skill and care may render a director liable for wrongful trading if he knew or ought to have known that the company could not avoid insolvent liquidation. The guilty director may then be liable to compensate creditors for the losses caused by his conduct. He may also be disqualified from acting as a director for up to 15 years. 

Practical steps

What can you do as a director to protect yourself when your company is in financial difficulties?

  1. Hold regular full board meetings and keep comprehensive minutes of commercial decisions and the reasons for them - indeed, keep notes of all significant discussions about the company's affairs.
  2. Make sure that you have full financial information and are aware of the extent of creditor pressure, court or recovery action by creditors and disputes.
  3. Make sure that the decisions you take are taken in the interests of creditors.
  4. Seek specialist advice. You are not expected to know all the answers about how to deal with financial distress.
  5. If you know or suspect that there is no reasonable prospect of the company avoiding insolvent liquidation, discuss the situation at a full board meeting with a view to taking specialist advice and initiating a formal insolvency procedure.
  6. Take independent advice if fellow directors do not share your concerns about the company’s solvency.
  7. Do not take further credit.
  8. Take steps to minimise losses to all creditors equally.

Points 7 and 8 can be particularly challenging in the real world and will be much easier to deal with if you have the benefit of specialist insolvency advice.

Seek advice early as this not only protects you as a director, it widens the options for rescue and turnaround action.

 

 

Date: 26th February, 2008
Author: Steve Smith

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