Director’s Duties & Responsibilities – Bridge Newland
Company Directors have a number of duties and responsibilities, these responsibilities can be onerous at the best of times but become more burdensome when the Company is considered insolvent. Therefore, whilst this article should not be considered legal advice, it does seek to help identify the main responsibilities of directors, the further considerations if the company is in financial difficulty, and gives some practical tips to help avoid any issues.
The Main Duties of Company Directors (As per the Companies Act 2006) Are:-
1. To promote the success of the Company – Directors should ensure that the consequences of their decisions are considered and that the company’s shareholders, employees, customers & reputation are not adversely affected.
2. To act in accordance with the Company’s constitution and within their powers – The Company’s constitution documents (being the memorandum and articles of association) must be followed.
3. To exercise reasonable diligence, care, and skill – Directors must keep abreast of the company’s financial position, exercise proper internal controls, safeguard assets and if they have any special skills or experience these must be put into practice. Directors must also remember that the Company’s property belongs to it and not to the shareholders.
4. To act in the best interests of the Company – Directors must exercise independent judgements and act in good faith. Therefore, if a director’s own interests conflict with the interests of the Company (such as property, pension or inter-company dealings) then action should be taken to disclose and/or avoid this conflict.
5. A duty not to accept benefits from third parties – No bribes should be accepted or personal wealth gained from third parties by directors for the exercise of their general functions as a director.
6. To keep proper records of account – Directors should maintain the financial records of the company and retain these records for the last 6 years of trading.
7. To seek external advice when required – Directors are not expected to know everything therefore if it would be beneficial to call in outside help, from experts, then this should be done.
Additional Duties of a Director of an Insolvent Company (As per the Insolvency Act 1986):-
1. Principle Duty – When a Company is insolvent then the directors of this Company must recognise that their primary duty is no longer to the shareholders but is now to the creditors, and maximising realisations for these creditors.
2. Not to trade whilst insolvent – Care must be taken to ensure that if trading continues then it is on a profitable basis and that the position for the creditors of the Company is not worsened. If it does worsen then the Director may be liable to a Wrongful Trading action (where they ought to have known than an insolvent Liquidation was inevitable) or a Fraudulent Trading action (where there was intent to defraud).
3. Not to make preference payments – As an insolvent Company cannot financially afford to pay all of its creditors in full then no creditor should be paid (unless it ultimately benefits the Company by a greater sum). This ensures that no creditor is preferred ahead of another creditor and avoids a Preference action (which would recover the sums preferred from the Director or the beneficiary of the payment).
4. Disposal of assets at an undervalue – No assets should be sold unless an independent valuation has been obtained confirming the amount received is a fair value. These proceeds should then be made available to the insolvency practitioner, to benefit all creditors.
5. Excessive salary / lump sum payments – No lump sum payments should be made to any employees over and above their usual pay and this pay must not be excessive, otherwise a repayment of these sums may be demanded by the insolvency practitioner.
6. Illegal Dividends / Loans – If the Company is making a loss then no employee should be remunerated by way of a dividend as dividends can only be paid from a Company making a profit. Also, generally no loans should be repaid ahead of other creditors unless a valid charge is in place.
If Company Directors breech these duties then they may be held personally liable for any losses to the Company, be fined or be disqualified from being a Director of a Company for up to 15 years. Therefore directors should be made aware of these duties and care taken to ensure that they comply to them.
Steps to Avoid a Breech of Duties:-
1. Advice – Seek independent advice from Licensed Insolvency Practitioners, Bridge Newland Limited, or from a specialist Insolvency Solicitor.
2. Customer Deposits – Do not accept deposits for goods or services that cannot be supplied.
3. Obtaining Credit – Don’t accept credit from the point when the director is aware that the Company is insolvent.
4. Trading – Cease trading if there is an inherent risk of trading at a loss.
5. Meetings – Hold board meetings with fellow directors and keep a detailed record every decision made.
6. Assets – Maintain security & insurance to protect assets and obtain valuations if sold.
7. Financial Position – Regularly review management accounts
8. Minimise Losses – Cut costs and focus on profitable contracts/work.
9. Pay Who? – No-one unless it ultimately benefits the creditors (and be sure not to bounce cheques).
10. Employees – obtain employment advice from a solicitor regarding all employee related issues.
Bridge Newland Limited are specialists in dealing with breeches of director duties in insolvency procedures therefore if you believe that one of your clients needs further advice on this topic, or may wish to discuss our insolvency services generally then call us for to arrange a no obligation initial meeting on 0800 612 6197 or visit our contact us page.
The sooner our help is sought, the sooner you will find a solution to your client’s problems.
For the latest news regarding a revamp in the director conduct reporting process, see HERE.