The essential guide for directors: insolvency, directors duties and avoiding personal liability
The UK government has sought to help company directors who are trying to guide their company through these unprecedented times. One notable change is the relaxation of the wrongful trading laws, for directors of companies who are in financial difficulty.
However, while some specific rules have been relaxed, directors should keep in mind that their general statutory and other duties remain in place, despite the current pandemic. Below we have summarised some of the key considerations for directors at present.
Suspension of wrongful trading provisions
Current insolvency rules state that where a limited liability company continues to trade where it is uncertain of its ability to repay debts, any director of such company can become personally liable for those business debts (s.214 of the Insolvency Act 1986).
The UK government has sought to implement policies which will reassure directors, who are required to make hard decisions regarding the future of the business. One such step is to temporarily suspend the application of s.214 of the insolvency act 1986 by UK Courts.
While this is not a get-out-of-jail card, the suspension of wrongful trading provisions offers comfort and clarity to directors who can then focus on the priority of guiding their business through the pandemic.
The relief will apply from 1 March 2020, initially for three months but with scope to extend and change such relief if necessary.
Irrespective of the legislation, directors should monitor the trading position of their business more carefully than ever. If there is any prospect of it being unable to meet its debts as they fall due, the directors must take action.
Directors duties still apply
The UK business secretary Alok Sharma has said [notwithstanding the suspension of wrongful trading provisions] "all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force".
The directors' primary duty is to promote the success of the company for the benefit of its shareholders as a whole. As a swift reminder, the directors' duties under the Companies Act 2006 (the Act) are:
- to act within powers
- to promote the success of the company
- to exercise independent judgment
- to exercise reasonable skill, care and diligence
- to avoid conflicts of interest
- not to accept benefits from third parties
- to declare interest in proposed transaction or arrangement
These duties are owed to the company and its shareholders, and creditors in the event of insolvency – the courts have held this is when the directors know, or should know, that the company is or is likely to become insolvent (i.e. insolvency is probable). In the event of a severe breach of these duties, directors may incur personal liability. It should also be noted that the fraudulent trading provisions under s.213 of the Insolvency Act 1986 remain in full force.
What should directors be doing to comply with their duties and protect themselves from liability?
There is no panacea for company directors in these troubled times. However, directors will significantly reduce the potential for personal liability by doing some simple things:
- Focus on the financial position – directors need to assess the financial position of the company – especially cash flow; this may include new policies limiting the number or value of creditors.
- Hold regular board meetings (phone calls and video conferences are likely to be fine) to show that all pertinent issues have been considered and discussed, and reasonable decisions made. Separate meetings should be held for each group company. Check the articles of association/shareholders agreements to ensure you follow any rules about how and when board meetings must be held. If you don't follow these rules, your decisions could potentially be challenged subsequently.
- Document board decisions - board minutes do not have to be essays – just a concise record of points discussed and decisions made. If nothing else, use the 'record' setting available on most video conferences and back it up; advisers often attend board meetings – particularly in times of financial stress, and they will be able to provide an objective and well-documented version of events.
- Ensure you are comfortable that the company can meet its debts as they fall due; if your company strays into the 'zone of insolvency' ensure you take professional advice (from, e.g. an accountant, lawyer, insolvency practitioner).
- Check your D&O insurance; speak to your broker; understand the gaps. Most insurance will cover the directors' personal liability. Still, there are likely to be exclusions for reckless behaviour, or for 'conduct unbecoming' of a prudent, considerate director who adheres to good standards of corporate governance.
- Identify onerous contracts early - if your company has entered into a contract or has obligations that may overwhelm it - [think…the company may not be able to meet its debts], take advice and/or speak to the counterparty to see if a grace period can be given.
- Communicate – with lenders, key customers, suppliers, stakeholders/shareholders, pension trustees; dialogue with all the parties is implicit in fulfilling the role as a director of a company and discharging directors' duties.
- Act early – identify risks, discuss with fellow directors, take professional advice as soon as necessary.
- Get shareholders' approval – if you are a director of a group company, and your company is being asked to 'take one for the team' (e.g. take on an onerous obligation for the greater good of the group as a whole), ensure you understand the full picture, act in the best interests of your company, and if need be, get shareholders' direction (i.e. directing you to take the specified action).
- Focus on your company – a director must act in the best interests of his/her company – not another company in the group.
- Every type of director – the duties (and therefore potential personal liability) applies equally to a de jure director (a person validly appointed as a director), a de facto director (a person who acts as if they are a director and is treated as such by the board but has not been validly appointed) and a shadow director (any person whose directions or instructions the directors of the company are accustomed to act). Think carefully about who this may apply to, and ensure they understand what is expected of them. People involved in management may well be treated as directors.
Vistra Corporate Law can help directors and companies mitigate business risks through astute advice on the best action to take to remain compliant with your duties and responsibilities as a director. If you have any questions or require any support, please get in touch.
Senior Manager, Solicitor, Vistra Corporate Law
E [email protected]
T +44 (0)117 918 1256
Senior Associate, Solicitor, Vistra Corporate Law
E [email protected]
T +44 (0)117 9181216