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Directors’ Duties, Insolvency and the Coronavirus Pandemic

As a result of the current Coronavirus pandemic, companies and their employees, creditors and members are facing financial issues of great complexity.

Over the past 9 months, many businesses have been hit hard with forced closure and a decrease in business.

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) has tried to limit the financial distress many businesses are facing by introducing restrictions on statutory demands and winding-up petitions.

CIGA also introduced provisions relating to the suspension of liability for wrongful trading, which protects directors in certain circumstances. It does not however provide total immunity and directors must continue to be mindful of their general duties towards both the company and its creditors.

 

Directors’ Duties and Insolvency

Directors owe a number of general duties to their company and these continue to apply at present. These duties are set out at s.171 to s.177 of the Companies Act 2006 and include a duty to promote the success of the company and a duty to exercise reasonable care, skill and diligence.

While the company is solvent and business continues to trade on a good financial footing, a director will owe these duties to the company. However, when a company becomes (or is close to) insolvency, the directors’ duties shift and they are instead owed towards the creditors of the company.

A company is deemed to be insolvent when it can no longer pay its debts as they fall due or its liabilities exceed its assets.

It is important to recognise this change in a company’s financial standing. At this point the directors must ensure any further action taken is in the best interest of the creditors, namely not continuing to trade and increasing a company’s liabilities, when they know or ought to conclude that there is no reasonable prospect that the company will avoid going into either insolvent liquidation or administration.

 

Consequences

Breach of directors’ general duties can lead to a number of serious consequences, including personal liability, disqualification as a director and in the most serious cases, criminal liability. In addition, depending on the circumstances and the actions of the director leading up to the company’s insolvency, a director could be found guilty of fraudulent trading (carrying on business with the intent to defraud creditors) or misfeasance. They too carry similar serious consequences.

It is important to note that these duties and the consequences that flow apply to all directors.

 

Next Steps

While there is light at the end of the tunnel, the current lockdown restrictions remain disruptive and the global economy faces a long road to recovery. The temporary measures introduced by CIGA, alongside the Government’s loan facilities and support schemes have helped weather the storm for some businesses.

However, we know that for some businesses, these measures may not be enough.

If your company is facing financial difficulty and solvency is in question, there are various steps you should take as a director to protect both the creditors’ interests and to minimise your own liability.

The steps will vary greatly depending on the situation. You should stay informed, keep accurate records and up to date accounts and most importantly, seek independent advice from a lawyer specialising in insolvency and a licensed insolvency practitioner.

 

For more information or advice on this or any other insolvency-related issue, you can contact Head of Insolvency and qualified Insolvency Practitioner, Annabel Whittaker on 0115 9 100 256 or send her an email.

Posted on February 26, 2021

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