Coronavirus Blog Series: Director’s Liabilities

Published 7 May 2020

Directors beware – temporary suspension of wrong trading does not mean you cannot be personally liable for decisions taken during this crisis.

In normal circumstances, directors of distressed companies would be extremely concerned of the risks of becoming personally liable for carrying on trades while the company is insolvent, which can be defined as ‘wrongful trading’ under insolvency law. Wrongful trading is an offence under the insolvency law and the companies act. 

In the face of this pandemic crisis, the UK Government has proposed welcoming measures to amend the insolvency rules by introducing temporary suspension of wrongful trading and relaxation of rules around moratorium and restructuring. 

While relaxations of these insolvency rules have been welcomed by business communities, the risk of personal liability to directors will not be entirely removed. Further, the proposal has not yet been passed by the Parliament and the fine prints in regard to the scope and extent of these exceptions to the rules are still yet unknown. The Business Secretary has further reiterated that “all of the other checks and balances that help directors fulfil their duties properly will remain in force“. 

In particular, director’s legal duties contained in the Companies Act 2006 and fiduciary duties still apply to every director. Directors who breach any of these duties still face the risk of sanction and possible disqualification as a result of any misconduct.

What are Directors legal duties?

Duty to act within powers. In essence, the directors are required to act in compliance with the company’s articles of association, any agreements between all members of the company, any resolution or other decision passed in accordance with the company’s constitution, any decision of the members. 

It is important to review your articles of association and any shareholders’ agreement that exists. If your powers are limited by those constitutional documents, engage with your shareholders as early as possible. In this circumstance, you may propose to the shareholders to ratify any actions previously taken prior to their specific approval or propose to your shareholders to pass a resolution granting the board general authority and power to act. However, it may require a variation to any agreements between the shareholders if the proposal to take decisions is in such a manner that contradicts the shareholders’ agreement. 

Duty to promote success of the company. this requires the directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard to:

the likely consequences of any decisions in long term;

the interests of the employees of the company;

the need to foster the company’s business relationships with suppliers, customers and others;

the impact of the company’s operations on the community and the environment;

the desirability of the company maintaining a reputation for high standards of business conduct; and

the need to act fairly as between members of the company.

Duty to exercise independent judgment. Each director must exercise independent judgment, without subordinating their powers or recklessly follow advice or instructions of any third party or other director.

Duty to exercise reasonable care, skill and diligence. The directors must apply care, skill and diligence in performing their functions, which includes knowing when to seek professional advice.

Duty to avoid conflicts of interest. The directors must avoid conflicts of interest, in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

Duty to declare interest in proposed transaction with company. The directors must declare if they are in any way, directly or indirectly, interested in certain transactions or arrangements with the company.

Duty not to accept benefits from third parties. A director of a company must not accept a benefit from a third party conferred by reason of the director being a director, or his doing (or not doing) anything as director.

Your fiduciary duties

These are duties which have been established by the courts under the common law and equitable principles. Most importantly, such duties include fiduciary duties of good faith and loyalty, common law duty of skill and care, and the equitable duty of confidence.

Other specific duties of directors

Some of these specific duties tend to be overlooked yet these requirements are also imposed on every director by the CA 2006.

Accounting and reporting. The CA 2006 requires all private and public companies to prepare annual accounts together with a directors’ report, unless they are exempted. A company’s directors are therefore responsible for ensuring that it complies with its responsibilities in this regard.

Additionally, every company must keep adequate accounting records that can sufficiently show and explain the company’s transaction, disclose with reasonable accuracy the financial position of the company at that time; and enable the directors to ensure that the accounts they are required to prepare comply with the relevant requirements of the law.

Corporate records. Separately, it is compulsory for every company to keep records concerning its general meetings and resolutions passed by it, which comprise minutes of all proceedings at general meetings, copies of all resolutions passed otherwise than at general meeting and records of decisions by sole member companies.

Statutory filings. Directors are responsible to ensure that its accounts and reports are filed with the Registrar of Companies within set deadlines. Filing requirements vary depending on the size of the companies.

Statutory Registers. Companies, and ultimately their directors, are required to establish and keep certain corporate registers in accordance with specific requirements under the CA 2006, including, register of members, register of directors, register of secretaries and register of charges.

Appointment of Auditor. Unless, a company is qualified as small company or dormant company, it must appoint an auditor for each financial year.

There has never been a more crucial time than now to hold board meetings, and in doing so, consider and discuss your duties as directors and to properly document and maintain minutes of those meetings. In case of disputes, this will allow you to demonstrate that those elements described above have been taken into account while you carry on the business during this unprecedented crisis.

We have increasingly received enquiries from our clients for advice on their legal duties as directors while they consider taking various measures in dealing with this unprecedented crisis. Please contact us if you have any concerns about your business situation or your own personal circumstance. Should you require any further information on the above, please contact the Corporate team at MKB Law.

This article is for general guidance only and should not be regarded as a substitute for professional legal advice.

MKB Law is regulated by the Law Society of Northern Ireland. Content is copyright © MKB Law 2024. Terms & Conditions apply.