Directors’ duties under the Companies Act 2006 are owed to the company itself. However, when a company is facing financial difficulty its directors must also consider the interests of the company’s creditors. Failure to do so can lead to the directors incurring personal liability.
When a company reaches a stage where there is no prospect of avoiding insolvent liquidation the interests of the company’s creditors become paramount. The directors must take all appropriate steps to minimise losses to the company’s creditors, which will usually mean ceasing to trade. If directors decide to trade on beyond the “point of no return” they may find themselves subject to a wrongful trading claim by the company’s liquidator. If the Court agrees, the directors will be ordered to contribute to the additional losses incurred by the company as a result of the continued trading.
In order to guard against such a possibility directors of companies in financial trouble should consider the following steps.
Directors are subject to duties as set out in the Companies Act. Where a director’s conduct as fallen seriously below this standard a liquidator can bring a claim under section 212 Insolvency Act 1986, usually known as a misfeasance claim. The Court has the power to order that directors who have been guilty of misfeasance contribute towards the company’s losses.
A misfeasance claim is reserved for the most serious examples of wrongdoing. It is a defence for a director to show that he or she made an innocent, but honest, mistake. It can also be a defence if the director took, and acted on, professional advice.
The Court can make a disqualification of between 2 to 15 years against a director of a company whose conduct makes that person unfit to be concerned in the management of a company. In assessing unfitness the Court will consider:
The Court will typically make disqualification orders falling into three brackets – 2 to 5 years where the conduct is “relatively not very serious”; 6 to 10 years for “serious cases that do not merit top bracket”; and 11 to 15 years for particularly serious cases, including fraud.