Directors’ duties in the twilight zone

Company directors need to be aware that if their business enters a difficult financial position and is facing insolvency, this ‘twilight zone’ can lead to additional financial and legal liabilities, so they need to act appropriately.

When a company is in financial difficulty, directors may have a duty to act in the best interests of the creditors instead of shareholders and a breach of this duty could lead to claims for financial compensation.  The difficulty many directors have is being able to distinguish if and when this change of duty should take place.  This is where specialist advice should be sought, so that they can record information and decisions taken to demonstrate they were acting within their duties.

A recent Supreme Court ruling BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents) has provided some greater certainty as to what the responsibility is in relation to creditors.

Given every business and the challenges they face are very different, it is up to all company directors to familiarise themselves with their duties, as they are personally accountable for their actions in company law.  They should remember that enforcement action can be taken against company directors, and they could be sued individually.

Directors’ duties apply to any person who is a director, shadow director, executive and non-executive and in certain situations former directors.

General directors’ responsibilities are to Companies House and documents such as the confirmation statement, the annual accounts, changes in company’s officers or their personal details, changes to the registered office, allotment of shares, registration of charges ie mortgage and any changes in your company’s people with significant control.

Holding regular board meetings and clearly evidencing decision making and the steps directors have taken helps to demonstrate compliance.

The other seven key directors’ duties are:

1.   To act within their powers

2.   To promote the success of the company considering:          
      – The consequences of decisions including the long term

      – Interests of employees

      – Need to support business relationships with suppliers, customers, and others

      – Impact of operation on the community and environment

      – Company’s reputation for high standards of business conduct

      – Need to act fairly to all members of the company.

3.   Act with independent judgement

4.   Exercise reasonable care, skill, and diligence

5.   Avoid conflicts of interest

6.   Not accept third party benefits

7.   Declare interests in a transaction

Getting corporate governance right is vital, especially if trading becomes difficult. It is therefore better to take professional advice if you are a company director and find yourself in this position.

Sarah Astley can be contacted at s.astley@gullands.com