Director Duties
In the world of insolvency, the term ‘Director Duties’ is utilised quite regularly, however, practical experience in this field indicates that not all those who take on legal Directorship have a robust knowledge of the duties imposed, and moreover the potential ramifications if a limited company enters an insolvency process and due regard was not placed on said duties.
Firstly, where do the duties originate? The Companies Act 2006 is the primary source, with the Insolvency (NI) Order 1989 coming to the fore as and when the company’s solvency comes into question.
Under the Companies Act 2006, a Director owes both fiduciary and statutory duties to the company (and therefore its shareholders). These include, but are not limited to, the following:
A duty to act within their powers.
A duty to act in good faith.
A duty to exercise independent judgment.
A duty to exercise reasonable care, skill and diligence; and
A duty to avoid conflicts of interest.
The pinch point is when the solvency of the limited company is called into question. This point in time may not always be clear cut. At the point where the company is either insolvent or is likely to become insolvent, a Director’s focus must shift from considering the interests of the shareholders to prioritising the interests of the company’s creditors.
At this point, a Director should take all reasonable steps to minimise losses to the company’s creditors.
It should be noted that, under the Insolvency (NI) Order 1989, Directors may face personal liability for fraudulent trading or wrongful trading where they continue to trade when the business is insolvent or has no reasonable prospect of avoiding an insolvency process, and they fail to take every step to minimise the potential loss to creditors of the company.
Practical Guidance for Directors
A Director should act with due care and regard for the duties imposed on him or her by the Companies Act 2006 at all times. When company solvency is in question, caution should be taken to avoid breaching the duties that come into play under insolvency legislation, thus avoiding a breach of duties and potential personal exposure. Some practical actions could include:
Produce and closely monitor a 13 week cash flow forecast, paying particular attention to any potential “shocks” or cash requirements in the short term, as well as contingent receipts that may be delayed or not materialise. Consider best case, likely case and worst case scenario planning.
Engage with your lender either directly or in conjunction with an insolvency practitioner.
Hold regular board meetings which should be minuted and well documented.
Agree internal policies around goods/services orders in the short term. No orders should be accepted where there is a risk of failure to deliver.
Engage with key suppliers and agree internal policies around the payment of suppliers and creditors in the short term.
Engage with any creditors who have either threatened legal action, issued legal correspondence, or presented legal or statutory demands.
Do not incur fresh credit.
Seek professional advice in the form of an insolvency practitioner and / or a solicitor with experience in restructuring and insolvency.
These practical steps should provide a flavour of some of the key considerations as and when the solvency of the business is in question. At the heart of it all is the need to take every step to minimise the potential losses to creditors.
Speaking to an experienced and qualified insolvency practitioner can be the difference between business survival and business failure. Keenan CF have the experience and the knowledge to support company Directors in a time of distress.
Chris McNeill
Licensed Insolvency Practitioner at Keenan CF