Directors of failing or insolvent companies

What are a director’s duties?

The general duties of a director are set out in the Companies Act 2006. The duties that you owe to the business include:

• To act in accordance with the company’s constitution
• To promote the success of the company which includes acting in the company’s best interests
• To exercise independent judgment
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties and,
• To declare an interest in proposed transaction or arrangement.

If your company becomes insolvent or is uncertain of insolvency the interests of your creditors must be considered and you are not free to take action which puts the creditors at risk of not being paid. The interests of the creditors must be considered as paramount rather than being given equal consideration alongside those of the shareholders.

What happens if a director fails to carry out their duties?

When a company is solvent it is up to the shareholders of the business to approve in advance or approve retrospectively the actions taken by the director.

However, if your company becomes insolvent and enters into liquidation your actions as a director may be subject to investigation by the liquidator. Liquidators have the power to bring claims for fraudulent or wrongful trading and you could potentially be held personally liable for the loss caused.

Since October 2015 it has been possible for liquidators to assign a right of action regarding claims for fraudulent trading, wrongful trading, transactions at an undervalue, preferences and extortionate credit transactions. Therefore, whilst liquidators may not have funds to pursue any such action there a number of third parties who specialise in acquiring these actions and have the funds to pursue them.

What can a director be held liable for?

There are a variety of claims that could be made against you including:

• Wrongful trading
• Repayment of director’s loan accounts
• Transactions defrauding creditors
• Transactions at an undervalue
• Fraud in anticipation of winding up
• Transactions in fraud of creditors
• False representations to creditors
• Misfeasance
• Fraudulent trading

People who have not been formally appointed as a director may also be held liable. Shadow directors are defined in the Insolvency Act 1986 as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.