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Directors duties, a reminder

There has recently been a wave of new entrepreneurs, and figures from Companies House show that in 2020 there were 24,951 new businesses incorporated in Kent, a rise of 32% on the previous year and nationally 772,002 new businesses, an increase of 14%.

Setting up a new business carries with it some element of risk and sadly not all of these businesses will be successful in the future. Being a company director carries a number of duties and obligations and it is important to be aware of these, especially if the business starts to struggle.

When a business is insolvent or on the verge of or likely to go insolvent, the duty owed by a director shifts from what would be in the best interest of shareholders, to what would be in the best interests of creditors.  Because of this shift in duty,  Directors should not resign from a company in financial difficulties until they have been resolved or until the business enters formal insolvency proceedings as they themselves could become personally liable for the decisions they made, if these go against their duties.

It is important that the business assets are managed to give priority to creditors.  Directors cannot dispose of any company assets or make payments to shareholders if provision for creditors hasn’t been made.  In reality however, where a company is insolvent, those provisions cannot be made and therefore no type of payment should be made.

As hinted to above,  Directors who fail in their duties can have claims made against them by an insolvency practitioner acting as a liquidator or administrator if the business enters a formal insolvency procedure. This could also include a claim against directors for misfeasance - effectively breach of duty.

Claims against directors can also be brought for wrongful trading and many directors fall foul of this in the unrealistic belief that they can trade their way out of difficulties.  As tempting as this option may seem when struggling, any Director should be weary of taking such actions without first obtaining legal advice as to what they can and cannot do.

Other issues that can arise include allowing payments to creditors which constitute preferences, ie paying one creditor before another.  Directors are advised to take advice from an insolvency specialist if they have any doubts.

Professional advice and assistance, especially when a company is struggling and Directors face the risk of becoming personally liable for missteps, also provides a more objective, third party perspective on what options are available.  And, in the event that a claim is made against the directors, taking professional advice early can also help them to defend the claim.