Directors’ common duties and their risks in the pre and post insolvency period.
Being a director of a company is a responsible job. A director is bound by several statutory and non-statutory obligations, duties and restrictions under the common law as well as the Companies Act 2006 (“the Act”). Under the insolvency Act 1986 (“IA”) they also owe several duties to the company creditors and the appointed Insolvency Practitioner (“IP”).
A director is generally classified into three categories such as De Jure Directors (appointed in compliance with the Articles of Association), De Facto Directors (treated by the board of directors as a director despite a lack of formal appointment) and Shadow Directors (a person who exerts control over the directors of the company). Although the directors may be employees of the company (in some cases they are not), they have certain specific powers and duties in addition to that of an ordinary staff. A directors’ duties and powers are defined in the company’s Articles of Association and in their employment/service contract. The duties and powers of a director vary from one director to another. For example, a managing director manages the day to day affairs of the company and has executive powers when it comes to key decisions compared to that of a Sales director or a Finance Director. Some of the general duties of a director are summarized below: -.
- To act within powers (S-171 of the Act)
- To promote the success of the company (S-172 of the Act)
- To exercise independent judgment (S-173 of the Act)
- To exercise reasonable care, skill and diligence (S-174 of the Act)
- To avoid conflicts of interest (S-175 of the Act )
- Duty not to accept benefits from third parties (S-176of the Act )
- To declare any interest in a proposed transaction or arrangement (S-177 of the Act)
- To maintain confidentiality of the company’s affairs
- To keep proper books and records of the company and register/file statutory documents.
- Not to accept loans from the company, without prior shareholders’ approval (S- 197 of the Act) (exemptions apply)
The director primarily owes the above duties to the company and its shareholders. However, if the director thinks that the company is insolvent, his/her duty to the shareholders shifts to the creditors of the company. This would mean that, following insolvency, the director must protect the assets of the company for the benefit of its creditors, not for the shareholders. He or she should not engage in any activities and or transactions that will reduce the assets and or their value, possibly by selling the assets at an undervalue or gifting in preference to other creditors or taking the assets out of the reach of the creditors.
They also have some specific duties to the IP in the pre and post appointment period. Their main duties to the IP include:-
- Provide a statement of affairs detailing the assets and liabilities of the company;
- Co-operate with the IP and provide relevant information as regards the affairs of the Company;
- Attend the initial meeting of the creditors;
- Attend on the IP at such times as he/she may reasonably requires.
When a company goes into an insolvency proceeding, the IP investigates the conduct of the directors, who were directors of the company in the last 3 years prior to its insolvency. This includes any directors that have resigned within this period. In other words, there is no escapism for the directors by resigning their position before placing the company into insolvency proceedings. As part of the investigation the IP will review the acts and dealings of the directors and review whether the directors have fulfilled their obligations under the Act and IA in the pre and post insolvency period.
The directors could be subject to criminal offences and could face up to 10 years of imprisonment or fine or both for their actions such as :-
- Fraud in anticipation of winding up s-206 of IA.
- Transactions in fraud of creditors -S-207 of IA
- Misconduct in case of winding up -S-208 of IA
- Falsification of company books and records S209 of IA
- Fraudulent representation to creditors S-211 of IA
Breach of your duties as a director could also result in disqualification, under a court order or an undertaking with the Secretary of State, for up to 15 years under the Company Directors Disqualification Act 1986. Acting in contravention of the disqualification order is an offence and the directors become jointly and severally liable for the company debts. In some cases, they may incur the risk of personal liability, even without a disqualification order, for wrongful trading, for the period they have acted as the director of the company. They can also be subject to compensation order to compensate the creditors for their losses.
In short, the director should be mindful of their position and duties in a pre and post insolvency situations. Consulting with an insolvency specialist and seeking legal advice may reduce directors’ exposure to personal liability and/or other potential legal actions. A more detailed analysis of some of the common but serious misconduct of directors, following an insolvency, will be discussed in my forthcoming articles. Watch this space for my next article on “illegal dividend to directors”
Failure to seek insolvency advice at an early stage would place you at risk and or an adverse situation/position.
If your company is insolvent and you as a director require early advice please call us for free and confidential advice from one of our professional advisers on 01474532862 or email to firstname.lastname@example.org or email@example.com.