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:
- Act in the company’s best interests taking everything you think relevant into account.
- Obey the company’s constitution and decisions taken under it.
- Be honest and remember that the company’s property belongs to it and not to you or its shareholders.
- Be diligent, careful and well informed about the company’s affairs. If you have any special skills or experience use them.
- Make sure the company keeps records of your decisions.
- Remember that you remain responsible for the work you give to others.
- Avoid situations where your interests conflict with those of the company. When in doubt disclose potential conflicts quickly.
- 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?
- 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.
- 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.
- Make sure that the decisions you take are taken in the interests of creditors.
- Seek specialist advice. You are not expected to know all the answers about how to deal with financial distress.
- 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.
- Take independent advice if fellow directors do not share your concerns about the company’s solvency.
- Do not take further credit.
- 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.
Comments (8) Read through and enter the discussion with the form at the end
We are a small family business and have recently sold £2000.00 worth of cladding to another small company. 2 weeks after delivery we get told the company has gone into liquidation. The company director who ordered the goods admitted that he knew his company was in trouble in court yesterday and his company difficiency were £115,745.00 with nothing in the bank, and book depts of 2119.00.
Q, Has this director committed an offence and would we be able to sue him personally for the cost of the material for trading whislt he knew he was insolvent.
Many Thanks
Michael Blackwell.
Michael
The director may have breached s214 Insolvency Act 1986 and be guilty of wrongful trading, but a creditor can't sue him personally. The remedy is for the liquidator to apply to court for a declaration the the director makes a contribution to the company's assets.
Chris
Hi can you please advise on this issue.
we are a company that has recently went itno liqudiation and in the process of closing down
One of our directors, who helped contribute to our closure has been assigned the administator, to wind the company up as there is not enough money to pay an insolvency company....is this correct procedure?
Only a licensed insolvency practitioner (or the Official Receiver, a civil servant) can wind a company up
I have recently received a tribunal notice from an ex employee who has made a claim against me personally at home address, and not the companies registered office address for one weeks salary.
My question is this as the ex Managing Director that was paid PAYE from the LTD company myself , why can this individual try to claim against me personally even though her contract was with the company and the LTD company paid her Ni and Tax\etc not me?
Alan
On the face of it the ex-employee should be pursuing the company, not you personally, and I would hope the tribunal would therefore reject the claim. The problem is that claimants can try to claim against whomever they like, even if their claim is bound to fail through being ill-founded.
Since you have become a target of legal proceedings you should protect yourself by taking legal advice, which this comment is not.
Chris
I had an IVA in 2007 for 1 year. The IVA was completed in April 2008.
During my IVA preparation I was not advised that a CCJ had been made against me either by the IP or by the court. I was not advised that a CCJ remains on my credit report for 6 years. I was not advised that once the IVA has completed that creditors still have a claim on any windfalls that might arise for 6 years following a completed IVA ( recent successful PPI claims have gone back to original creditor).
On completion of my IVA the IP did not inform my creditors and I ended up doing it.
Can I sue them for poor advice, misselling etc?
John
Your enquiry is off topic, but my brief thoughts are that the IP wouldn't have known about the CCJ as you didn't tell him (because you didn't know about it either); your credit status would have been adversely affected anyway by the IVA; if windfalls go to creditors under your IVA it's because that's what your IVA specifies; and the IP would have given notice of the IVA's completion to your creditors in order to be able to vacate office as Supervisor. You are clearly dissatisfied with the situation in which you find yourself, but it is highly unlikely you would succeed in a claim against the IP. However, IVAs are highly individual and your proposals and what took place in formulating and agreeing them would need to be considered in detail for someone to be able to advise you fully.
Chris