Recently our insolvency specialists Sandra Mundy and Sue Staunton led an insightful webinar in which they discussed the key responsibilities and obligations of business directors and how they can mitigate risk when managing businesses in challenging times.
Key challenges facing businesses in 2023
Opening the webinar, Sue said that the UK is currently facing the most challenging economic outlook since the 1970s with issues at home including recession, inflation, surging energy prices, rising interest rates and workforce shortages. More broadly, the world economy is also suffering from issues such as the war in Europe, ongoing supply chain disruption, Covid restrictions in key supplier countries and extreme weather events.
All of these challenges, Sue said, are having an impact on businesses by squeezing profitability, increasing borrowing costs, presenting cash flow challenges, disrupting supply chains and forcing changes in staff working patterns. Red tape is also on the rise and many companies are struggling to comply with more and more regulations.
With so many issues affecting businesses right now, directors are under pressure to take the right actions at the right time and many may not be aware of the responsibilities and obligations that they must adhere to while doing so.
What are directors’ duties?
Broadly speaking, a director is anyone who, together with other directors, is responsible for the management of a company or organisation. Sue said it is important to remember that this also includes charity trustees, even if their role is unpaid.
Directors have certain obligations which are comprised of Directors’ Duties as laid out in the Companies Act 2006, other Companies Act requirements, requirements under other legislation and obligations within the articles of the company. In brief, these include:
Directors’ Duties – Companies’ Act 2006
Other Companies Act Requirements
Requirements under other legislation
What are the consequences of a breach of directors’ duties?
Similarly, negligence in relation to activities of the company may be a criminal offence. This could include corporate manslaughter or even company vehicles being untaxed and uninsured. Even though a detail like vehicle insurance might be considered low level admin that directors feel they do need to think about, it is the directors who are responsible for making sure they are insured and so it is the directors who can be criminally prosecuted for a failure in this regard.
In addition, if breaching duties significantly, directors can be disqualified for up to 15 years.
Charity Trustees
On this point, Sue said charity trustees need to be particularly careful. Charity trustees are often unpaid volunteers but that is no excuse in the eyes of the law for not having a handle on the running of the organisation.
Consequences of insolvency for directors
Sue then handed over to Sandra who spoke about how insolvency affects directors’ duties and, importantly, how directors can mitigate risk. First, Sandra began by stressing that while it is not illegal in the UK for directors to continue to trade an insolvent entity, directors should be aware that the risk for them as individuals increases and if the company eventually enters a formal insolvency procedure, their actions are likely to be heavily scrutinised.
Mitigating the risk
To mitigate personal risk, once directors have identified that the company is insolvent, or at risk of becoming insolvent, they need to ensure they are acting appropriately. This includes changing focus from creating shareholder value, to protecting the interests of creditors and mitigating risk.
They also need to consider whether or not the company should continue to trade.
If they decide that the business is still viable and that they will continue to trade, then there are a number of actions they need to take for the benefit of the business, its creditors and mitigate their personal liability including:
What happens if the turnaround plan fails?
If the turnaround plan fails, the company is likely to enter into a formal insolvency procedure. If entering administration or liquidation, both administrators and liquidators have their own set of obligations they need to adhere to, and these include looking at director conduct in the 3 years leading up to the insolvency procedure.
Sandra said they do this for two reasons. First, they need to report that information to the Insolvency Service who use the information to identify if any action should be taken to disqualify directors. Second, they need to ascertain whether they should be taking any action to recover monies from directors or others to benefit the creditors. They also have an obligation to report any criminal activities to the relevant authorities.
The Insolvency Service is responsible for investigating director conduct. If director conduct is found wanting, they can seek a disqualification agreement or disqualification order. A disqualification agreement avoids the need to go to court whereas a disqualification order usually happens where a director doesn’t agree to be disqualified and seeks to defend an action in court.
When disqualification occurs, there are three periods for which a director can be disqualified:
Sandra said it is important to note that disqualification doesn’t just affect a person’s ability to be a director but can also have an impact on holding positions such as school governor or pension trustee, affect their ability to borrow money, and their impact career prospects and reputation.
What does the Insolvency Service focus on
When investigating director conduct in the time leading up to the insolvency procedure, the Insolvency Service will focus their efforts on a few key areas:
Recovery of monies for the benefit of creditors
Returning to the Insolvency Practitioner’s obligations, there are some grounds under which liquidators and administrators might consider bringing claims against directors that would pierce the corporate veil and require them to personally pay back monies owed. Common grounds where they might consider this include:
If acting appropriately and in accordance with their duties and obligations, a director shouldn’t have to worry too much about personal liability however with 802 director disqualifications and 119 criminal convictions against directors in 2021/21, it is clear that some directors are not carrying out their duties properly.
If you would like more information on this subject and how it might affect you please contact our TRI Team.