Member Article

Company Insolvency: What are my duties?

With Watson Burton LLP Law Firm

With company insolvencies on the rise in the current economic downturn, directors need to ensure that they are aware of their duties in relation to the solvency of the company and any additional duties that they may have where the company’s solvency is in doubt.

Many directors will be aware that their duties have been codified by the Companies Act 2006. Section 172 provides that one of the duties of a director is to promote the success of the company. However, where the solvency of the company is in question, common law provides that the directors owe a duty to act in the best interests of the company’s creditors rather than its shareholders. A lack of awareness in relation to the solvency of the company will not create a defence.

Directors need to be take care to avoid wrongful trading in relation to the Insolvency Act 1986 (“the Insolvency Act”). Under Section 214 of the Insolvency Act, from the moment the directors knew or ought to have known that the company has no prospect of avoiding insolvent liquidation, they are under a duty to take every step with a view to minimising the potential loss to the company’s creditors. If the directors breach this duty and the company subsequently enters administration or insolvent liquidation, the directors may face claims personally for the benefit of creditors.

It is therefore essential that, as soon as you become aware that the company is in difficulties, you will need to monitor the situation more closely, potentially with the benefit of professional advice. If the board of directors are not sympathetic to your concerns, resignation will not be enough to protect you from personal liability. You must be able to demonstrate that you took steps to attempt to change the mind of your fellow directors.

Directors also need to be aware that any creditors should not be preferred over other creditors unless there are justifiable grounds for doing so. Further, company directors should also take care not to dispose of assets for less than the market value since the court has the power to impose personal liability against a director where this has occurred.

Although it appears there are many traps that directors can fall into when a company is faced with insolvency, the Court will generally not punish directors who have acted reasonably and taken appropriate steps to protect the creditors. The best strategy is to seek early professional advice to ensure that you are protected by taking the correct course of action.

If you have any comments or questions about this article or any corporate recovery or insolvency matter, please contact David Hankin of Watson Burton LLP at david.hankin@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .