Directors’ duties

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It is vital, before accepting appointment as a company director, to appreciate the extent of a director’s obligations and duties given that, a failure to perform them appropriately can, in certain circumstances, lead to criminal and/or civil prosecution.

The general duties of a director under the Companies Act 2006 are:

1)      To act within their powers;

2)      To promote the success of the company;

3)      To exercise independent judgment;

4)      To exercise reasonable care, skill and diligence;

5)      To avoid conflicts of interest;

6)      Not to accept benefits from third parties;

7)      To declare their interest in a proposed transaction or arrangement.

In addition a director must avoid breaching legislation by, for example, avoiding continuing to trade when they knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation (section 214 Insolvency Act 1986).

The failure of City Link on Christmas Day 2014, and the resulting criticism of its management which followed, is a timely reminder that, when a company is on the brink of insolvency, directors will be required to balance difficult decisions about, for example: which creditors to pay (e.g. staff, suppliers, HMRC); whether to accept pre-payments from customers and how to treat them; how to deal with third party goods; whether to honour contractual commitments; redundancy decisions and so on. When a business fails, someone loses as there is inevitably insufficient cash to go round.

If a company enters liquidation or administration, the insolvency practitioner will, as part of their remit, consider the decisions made by the directors, particularly in the period leading up to insolvency. A director who breaches their duties (which can include a failure to act) could be personally liable for their default and may ultimately be disqualified from subsequently acting as a director. A liquidator may, where appropriate, bring claim(s) against a director including fraudulent or wrongful trading, breach of duty and/or in relation to transactions where a director has failed to act in the best interests of the company or its creditors. If successful, such claims will be likely to result in personal liability for the director concerned.

A finely balanced situation can quickly deteriorate to the point where the company has no reasonable prospect of avoiding insolvency and it is therefore important to regularly review the company’s position and to document the reason for all material decisions. There is no substitute for seeking independent professional advice at an early stage. From experience, the range of available options will be wider and the risk of personal liability reduced, the earlier that advice is sought.

A version of this article appeared in the East Anglian Daily Times on 17 March 2015.

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John Bradshaw is an Insolvency & Business Recovery solicitor at Barker Gotelee, solicitors in Ipswich