Liquidation toolkit – directors’ duties

29 March 2019 / Insight posted in Practical guides

Day-to-day management of a company is delegated to its directors by the shareholders. Directors are often confronted by difficult decisions that can have a dramatic effect on the business and its financial position. In certain circumstances, this can result in directors incurring personal liability for corporate debts should the company be subject to an insolvency procedure.

Decision-making powers

The decisions of the directors are taken collectively by the board of directors. A director cannot act as a director on their own, unless only one director has been appointed. Decisions are either taken by majority vote at board meetings, or with the signing by all directors of a written resolution. The director’s role and powers are primarily defined in the company’s articles and, if they are also an employee, their service contract.

The mere fact of appointment does not normally give a director any executive powers. Most directors are, however, also employees of the company with specific powers delegated to them. A managing director usually has extensive powers to take day-to-day decisions on behalf of the company. Other directors, such as sales directors or finance directors, will have a more distinct role.

Directors owe a duty to the company and, if insolvency threatens, to creditors. Certain key duties of directors have been placed on a statutory footing under the Companies Act 2006. These duties are owed to the company. Directors are also subject to a number of other statutory requirements and restrictions. These include a duty to keep proper books and records, and restrictions on entering into certain transactions with the company, or accepting loans from the company. Breach of these duties and requirements can result in a director being disqualified from acting as a director and, in many cases, can lead to the director incurring personal liability.

Potential pitfalls

There are certain provisions of the Insolvency Act 1986 that directors need to be mindful of. Although they only apply when a company has gone into liquidation/administration, they relate to the conduct of the directors before the formal insolvency appointment.

Details of why the liquidator of an insolvent company may ask for an order from the courts for the director to be personally liable to contribute to the company’s assets, and/or certain transactions to be set aside are set out further in this document. This applies equally to non-executive, shadow and de facto directors as well as to executive directors.

How Moore Kingston Smith can help

Contact us for more guidance.

Our team has decades of experience in advising directors of their responsibilities and fiduciary duties. We can assist them in managing their role and responsibilities and advise on the best course of action so as to mitigate as far as possible, the risk of personal liability.

It is important to note that many provisions apply, not only to formally appointed directors, but also to shadow directors and de facto directors.

Where the directors fail to have sufficient regard for the interests of the company’s creditors in their management of the company, we can advise them of the risk of being disqualified under the provisions of the Company Director Disqualification Act 1986.

Timing is critical. The sooner a director takes professional advice, the greater the likelihood that the risk of personal liability and disqualification is diminished or removed.

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