Being a director is not just about managing and controlling a business; it also involves taking on certain legal duties and obligations. Directors get the benefit of limited liability, but directors' duties impose certain obligations to ensure they act in the best interest of the company, its employees, shareholders – and in certain circumstances, its creditors too.

Directors' duties were codified in the UK almost 15 years ago, under the Companies Act 2006 – so in that sense there's nothing new about being legally obliged to behave in a certain way. What is particularly relevant at the moment though is insolvency law, which legally obliges a director to consider the interests of creditors if their business is on the brink of insolvency.

With many businesses facing financial pressures created by the impact of COVID-19, there may be a temptation to focus solely on the survival of the business. However, if that focus results in a breach of director duties, there are potential penalties to be faced, such as director disqualification or being held personally liable for company debts.

Here's a run-through of your general duties, plus breaches to be aware of, if like many, you are concerned about the economic impact COVID-19 is having on your business:

General director duties

These are:

  • act within your powers;
  • promote the success of your company;
  • exercise independent judgment;
  • exercise reasonable skill, care and diligence;
  • avoid conflicts of interest;
  • declare interest in a proposed transaction or arrangement with the company; and
  • don't accept benefits from third parties.


Potential breaches when insolvency is likely, or has happened

If an insolvency process begins, an appointed insolvency practitioner is obliged to investigate the reason for the company's insolvency and to consider the conduct of its directors. This can result in questions being raised about actions you have taken, and the insolvency practitioner - and in some cases, creditors - can challenge your conduct, with a view to recovering monies and/or assets for the benefit of the creditors. The aim is to restore the company to the position it would have been in, had the conduct that is challenged, not taken place.

There are three offences to be aware of:

  • wrongful trading - it applies to current and former directors of companies that have gone into liquidation or administration, who allowed the business to continue trading even when they knew, or ought to have been aware, that liquidation or administration was inevitable. You may have seen reports about the temporary relaxation of this law earlier this year to help businesses impacted by COVID-19 – however, that ended in September 2020, so this rule is back in force.
  • misfeasance - if you have misapplied, retained or become accountable for any money or property of the business, the court may order you to contribute appropriately to the assets of the company.
  • fraudulent trading - if you're found to have carried on any company business, with the intention of defrauding creditors, the court may order you to make an appropriate contribution, whatever it considers to be appropriate to benefit creditors.


Tips to demonstrate director duty compliance

There may be circumstances where it is appropriate for a business to continue and try to trade its way out of financial difficulties, in an attempt to avoid formal insolvency, but if doing so, you must tread carefully and be mindful of creditors' interests and your duties to creditors.

If insolvency is likely:

  • review your financial position continuously to ensure you're not acting in a way that is detrimental to creditors and that by continuing to trade, you're not worsening their position;
  • keep records too, which clearly detail what decisions were made and why – in case they have to be shown later; and
  • take advice from a restructuring specialist at an early stage.

All of these show that you have taken every step possible, to minimise potential loss to creditors.

Considering creditors if there is a concern that a company is verging on insolvency cannot be over-emphasised. The consequences of breaching these duties can have serious repercussions, not just for creditors but also for your future as a director, and your personal assets.

Contributor

Lucy McCann

Partner