If you are a Director of a company and facing the possibility of insolvency, then steps need to be taken to ensure that your duties are undertaken correctly. Kam Majevadia from Sydney Mitchell, looks into the responsibilities Directors' have when faced with insolvency within their business.
As a Director you may think you have the protection or "shield" of the Limited Liability status, however this is not the case. As a Director of a company you have many duties, which if breached could lead to personal liability both in civil and criminal proceedings.
A Director has a duty to act in the best interests of the company at all times, this is known as a fiduciary duty.
The "General Duties" for a Director have now been set out in the Companies Act 2006, which came into force on the 1 October 2007. The Act sets out formally the "general" duties of a Director as follows:
The Act also requires a Director to promote the success of the company with regards to:
In the current economic climate companies may be threatened by insolvency. In these circumstances the focus of the Directors' duties shifts to the interests of the company's creditors. Directors' should be careful to then avoid wrongful trading, i.e. continuing to trade at a time when the directors' knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
In these circumstances the Directors' will be personally liable to pay the deficit arising in the company from the date when the company should have ceased trading to the date when the company actually ceased trading.
When reaching a decision on a wrongful trading claim, the Court will consider the general knowledge, skill and experience that might be expected of a person carrying out the same functions as the Director together with the actual knowledge and experience that the Director has.
If you are faced with a wrongful trading claim it is therefore important to try and show the steps that were taken in consideration of the creditors interests in the time prior to the Insolvency. Some practical steps that should therefore be considered are:
- Consider drawing up a business plan.
There will be occasions where there is an understandable desire to trade out of difficulties and so trading is continued to try and achieve this. Where it can be shown that the decision to continue trading was considered fully and that professional advice was taken it is possible that this could amount to a defence in a wrongful trading claim.
As a Director it is important that as soon as you think insolvency is a possibility professional help is sought and any decisions taken thereafter in relation to the continuance of the company are appropriately documented. If you are affected by any of the issues above, or would like some advice please contact Kam Majevadia or Leanne Schneider-Rose at Sydney Mitchell on 0121 698 2200.
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