Clarkslegal LLP - Solicitors in Reading and London

Directors’ Duties

Directors' Duties - Insolvent companies

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.  

Wrongful trading 

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. 

  • Take professional advice
  • Keep the company’s financial position under constant review
  • Make realistic projections
  • Document all decisions, particularly for small companies where management is usually less formal
  • Liaise with key creditors
  • Consider possible alternatives to liquidation, such as a company voluntary arrangement 

Misfeasance 

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.  

Disqualification 

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: 

  • All misconduct, including in the disqualification proceedings themselves
  • It is not necessary for the misconduct to directly lead to the company’s insolvency
  • Conduct as director of other companies
  • Commercial misjudgement in itself does not amount to unfitness
  • Previous good conduct is not a defence, although it may be a mitigating factor
  • Misconduct should not be judged with the benefit of hindsight
  • It may a defence that the director took and acted upon professional advice 

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.