Directors’ duties on insolvency

Directors’ duties on insolvency – key things to remember

Directors are bound by statutory and fiduciary duties to the company.

Sections 171-177 of the Companies Act set out the general duties of directors and officers.

These include the following:

To act within the constitution of the company.
To promote the success of the company.
To exercise independent judgment.
To exercise reasonable care, skill and diligence.
To avoid conflicts of interest.
To declare an interest in proposed transactions or arrangements.
Not to accept benefits from third parties.

Directors’ duty to promote the success of the company is subject to “any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company” (section 172(3), Companies Act).

The question is, what happens to those duties when the company becomes insolvent?

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Pursuant to section 172, paragraph 331 of the Companies Act Explanatory Notes, when a company becomes insolvent, the directors’ duty to promote the success of the company is replaced by a duty to act in the best interests of the company’s creditors. It means that directors must protect the value of the company assets and minimise losses to creditors as far as possible. For example, when the company is at risk of becoming insolvent, unreasonably overlooking the interest of a large creditor will be in breach of a director’s duty to promote the success of the company under section 172 of the Companies Act.

Directors also have a duty to take all proper steps to minimise the potential loss to creditors after becoming aware that there is no reasonable prospect of the company avoiding insolvency or liquidation.

In the event of insolvency proceedings, directors may be liable for the following statutory offences:

Transactions at an undervalue
Preference
Fraudulent trading and wrongful trading
Misfeasance and /or breach of duty

Directors should seek advice if they are in doubt at all as to their duties and obligations, whether they are facing insolvency or not.

At Ventura Law, we can help you at any stage to advise on the law, the processes and likely consequences.

About Ventura Law

Property Matters and Disputes Himanshu has been in the profession for over 25 years and is an experienced and highly skilled commercial lawyer, litigator and employment law adviser. He is analytical, methodical and always strives to ensure the best outcome is achieved for his clients.

Himanshu regularly represents directors, as well as shareholders and business owners in the range of legal matters that can arise. He is particularly experienced in employment disputes, and issues between partners, shareholders and directors.

Himanshu is also regularly instructed by other lawyers, accountants, doctors, dentists, surveyors, etc in their legal matters.

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Anything posted in this article is for general information only and is not intended to provide legal advice.

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“It was a pleasure working with Himanshu who not only was very professional and successfully dealt with my legal matter, but also supported and advised me effectively at a very sensitive time.

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