Directors of many companies are struggling with the financial uncertainty caused by the Covid 19 pandemic. With the threat of insolvency ever present many companies are simply trying to “hold on” and make it through the pandemic with as little financial damage as possible.
Directors have the added pressure to comply with their duties and responsibilities set out in The Companies Act 2006. The act imposes an array of obligations on Directors; failure to comply with these duties can result in personal liability for debts as well as third party claims.
Directors have various duties which are set out in legislation as follows:
- act within the powers conferred on the directors
- promote the success of the company
- exercise independent judgment
- exercise reasonable care, skill and diligence
- avoid conflicts of interest
- not accept benefits from third parties
- declare an interest in a proposed transaction or arrangement.
It is crucial that Directors are aware of these duties and ensure they act in accordance with them. The duties are owed to the Company, yet ordinarily this means to the shareholders. If the Company becomes insolvent or there is a real risk / likelihood of it becoming insolvent, the directors should act in the best interest of creditors.
If Directors act in breach of these duties shareholders can take action against them. If the Company becomes insolvent, a breach could result in liquidators bringing proceedings against the Director personally. Disqualification is also a possibility.
Conflicts can arise when Directors sit on the board of 2 separate companies and become privy to confidential information relevant to the other company. Conflicts should be avoided at all costs. Directors should also be cautious not to approve a transaction which they have an interest in, without declaring it to the board first. Directors will be judged against a standard of what skills a reasonable director should have and must ensure they act in good faith, in the best interests of the Company at all times.
Directors will need to be alert to their duties if the business is struggling financially and insolvency is considered likely.
Directors can be personally liable under sections 212 and 213 of the Insolvency Act 2986 in the event that they knowingly run a Company for fraudulent purposes or intend to defraud creditors. This extends to anyone knowingly involved and can therefore cover a much broader group rather than just Directors. A party found to be liable can be ordered to contribute to the assets of the Company from their personal estate.
A topical example involves companies placing employees on the Governments furlough scheme, claiming payments from HMRC whilst still requiring the employees to work.
“Wrongful Trading” is covered by Section 214 of the Insolvency Act and provides that the liquidator of a Company can apply to the court for contribution orders from Directors, of which they must pay from their personal assets. In order to apply for contribution orders the liquidator must be able to show that before commencement of winding-up, the company continued to incur liabilities, which the Directors should have prevented given that they “knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding an insolvent liquidation”. In order to avoid liability for wrongful trading Directors should ensure they take every step to minimise loss to creditors. Advice should be sought at the earliest opportunity.
Ex-Directors of insolvent Companies can be disqualified for two to fifteen years if their conduct is such that they are deemed unfit to be involved in company management. Directors should therefore ensure they keep their overriding duties in mind at all times.
Covid- 19 relief for businesses
The Corporate Insolvency and Governance Bill came into force on 25 June 2020. The Act contains temporary measures to support businesses during the pandemic.
Firstly, there has been a temporary suspension of the ability of creditors to recover debts. From 1 March 2020 to 31 March 2021 statutory demands cannot be used to recover debts. In addition creditors cannot follow winding up proceedings commenced from 27 April 2020 unless there are grounds to prove that coronavirus has not had a financial impact on the company. This is a significant hurdle to overcome.
Secondly, in the case of wrongful trading cases up until 31 March 2020 the court is encouraged to presume that the Director is not responsible for a Company’s financial difficulties. That being said, liability for wrongful trading still exists and Directors still need to be mindful of their duties and ensure they take steps to avoid breaching these duties.
If problems arise, Directors should seek professional advice as early as possible in order to mitigate any issues , should you require further advice or assistance then please contact Samuel Pedley on 01562 516119 or firstname.lastname@example.org.