Many businesses are continuing to struggle as a result of the ongoing pandemic and while many will bounce back, unfortunately others may struggle. If your company’s solvency is at risk or could be in the future, as a director there are various legal issues and responsibilities you need to be aware of.
Here we take a look at directors duties.
What are director’s duties?
Generally, its directors owe the following duties to a company:
• to act bona fide in its interests
• not to act for any personal or collateral purpose
• to take steps to avoid loss to its creditors
• not to enter transactions at an undervalue or make preferences; and
• to act in the normal manner of a director such as keeping proper accounts, disclosing interest(s) in transactions with a company, not to make a secret profit, etc.
All such duties fall equally on executive and non-executive directors.
CBILS and other government coronavirus support
Many companies benefitted from government support through the global pandemic. What happens now, and do the directors of a company have personal liability, if the company does not come through the global pandemic, or if it does, regardless?
In the case of a CBILS loan (or other financial support) such personal liability might arise if inaccurate information was provided on the application or if the CBIL was used for personal purposes rather than for the economic benefit of the company. This liability could arise regardless of whether a company is in financial difficulties.
Recently the government announced proposals for various extensions of support whereby the global effect is the prohibition of enforcing non-payment of commercial rent against tenants (until March 2022!).
Many reports are stating that the extensions in this regard are ‘good news’ for commercial tenants, and while that may be the case for some, directors of tenant companies need to take a serious look at their finances and consider whether accruing further debt is in the best interest of their business.
Directors need to ask themselves; is this sustainable and is this a viable model for their business?
If not, they could be acting in contravention of their duties and could be facing serious consequences as a result of misfeasance and breaching the Insolvency Act.
It’s important that directors remember that this debt (whether it be a CBIL loan or commercial rent) will have to be paid back at some point and they take action now to protect their businesses as well as protecting themselves from the personal liability of their business going under.
Moreover, when a company is liquidated (or enters a formal insolvency process), the limited liability structure typically means that directors are not generally liable for the debts of the company.
That said, exceptions to this rule do exist, and one is when directors have not fulfilled their statutory duties. In that scenario, directors can face personal liability for debts incurred by the company.
Directors’ potential personal liabilities
Again, in the general of terms, the directors of a company, if found to have failed in the duties they owe to a company, could have personal liability under the following various sections of the Insolvency Act 1986:
• Misfeasance (section 212)
• Fraudulent trading (section 213)
• Wrongful trading (section 214)
The government suspended liability under the wrongful trading provisions (section 214) however that “suspension” has yet to be fully tested in the courts and the personal liability provisions under misfeasance (section 212) and fraudulent trading (section 213) remain in full force.
Practical guidance for directors
As a director steps can be taken to limit any personal responsibility. It is essential that any steps taken are properly documented, since the actions of the directors will be carefully scrutinised by any future insolvency office holder of a company.
• Consider the tests for solvency in the context of a company
• Seek professional advice
• Take advice individually at some point in view of the personal risks involved in management of a company approaching insolvency
• Monitor the financial position of a company
• Continue to scrutinise transactions and ensure all are legitimate and for the benefit of the company
• Formulate a viable strategy
• Hold regular meetings
• Seek valuation(s)
• Keep major creditors informed
• Review financial obligations
Should you require specific legal advice on any of the issues raised in this bulletin (or generally in terms of director’s duties and insolvency please contact Catherine Moss or Gareth Hegarty or another member of the insolvency team in your local office.
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