4 minute read
Warning for directors:
Warning for directors: be aware of your duties!
Directors are largely responsible for the management and day to day affairs of a company. However, with power comes responsibility. Directors’ primary duty lies with the company: amongst other responsibilities, they must promote the success of the company for the benefit of the company’s members (section 172 Companies Act 2006).
Notwithstanding the above, once a company is bordering on insolvency and/or is finally declared insolvent, the duty owed to the shareholders shifts in favour of the company’s creditors. In the case of BTI 2014 LLC v. Sequana SA and Others [2022] UKSC 25 (“BTI case”), the Supreme Court confirmed the existence of a duty owed at common law by directors to consider the interests of the company’s creditors. This case confirmed that the creditor duty arises at an earlier stage when a company is bordering on insolvency or insolvency is imminent or probable. At the point where insolvency is inevitable or unavoidable, the interests of creditors become paramount and take precedence over the interests of shareholders. Failing to protect the creditors’ interests can expose directors to claims of misfeasance (misconduct) or breach of the directors’ fiduciary duties (such claims can be brought against a director by the liquidator or creditors of the company pursuant to section 212 Insolvency Act 1986 (“IA 1986”)).
Recently, in the case of Manolete Partners Plc -v- White [2023] EWHC 567, the High Court held that the director, who was guilty of misfeasance and breaches of fiduciary duty, is liable to draw down his pension benefits to pay a judgment debt ordered against him. The judgment was provided on the grounds that (a) the principal asset within the director’s pension fund was derived entirely from funds provided by the company; and (b) the judgment debt arose as a result of the director’s misfeasance and breaches of fiduciary duty whilst he was acting as the company’s director: had the director not breached his fiduciary duties, he would not have been entitled to retain his pension pot.
In addition, directors of insolvent companies can be exposed to claims of wrongful trading under section 214 IA 1986. Wrongful trading claims arise when directors fail to take every reasonable step to minimise the potential loss to the company’s creditors when they knew, or ought to have known, that there was no reasonable prospect that the company would avoid going
into insolvent liquidation or administration. Similar to claims of misfeasance, if a director is held liable for wrongful trading, the director can be disqualified and/or be required to compensate the company’s creditors for any loss caused to the creditors.
Whilst many directors may “enjoy” a smooth ride whilst a company is operative, their “enjoyment” might be short lived once the company enters into financial difficulties and the director’s conduct falls under scrutiny. The BTI case provided guidance for what directors can do to avoid claims of misfeasance and/or wrongful trading. To avoid any pitfalls, directors should:
• have access to reasonably reliable information about the company’s financial position;
• record any decisions pertaining to the company’s finances in writing, providing reasons for such decisions;
• maintain up to date accounting information (or instruct others to do so);
• take a view as to whether the company’s cash reserve and asset base have been eroded and there is a risk that the creditors may or will not get paid when due;
• undertake appropriate training about their responsibilities, and about the penalties if they disregard such training; and
• where appropriate, seek professional advice.
