While the government continues to take steps to limit the impact of the lockdown on the UK economy, many companies face challenging times, with directors playing a pivotal role in formulating and steering their company’s response to a pandemic.
To assist, Trainee Solicitor, Daniel Halls has summarised the statutory duties owed by UK directors under the Companies Act 2006, the potential risks of continuing to trade while possibly insolvent, and actions that should be taken in order to mitigate those risks.
- Directors must promote the success of the company for the benefit of its shareholders. However, the emphasis changes if the company is, or is on the verge of insolvency. If a company becomes insolvent the directors must put the interests of creditors as a whole before those of shareholders. The precise details of what factors they should consider in order to comply with those duties will vary from case to case. We recommend that company directors should seek professional advice if in any doubt.
When will a company be deemed to be insolvent?
- As a general rule, there are two tests to deem whether a company is insolvent. Firstly, a company is likely to be insolvent if it cannot pay its debts as they fall due. Secondly, if its liabilities (taking into account its contingent and prospective liabilities) exceed its assets. If directors think their company may be insolvent on either test, their duties are owed primarily to creditors, as highlighted above.
- The application of these tests in such unprecedented times has not yet been tested, and will no doubt develop as this period of economic uncertainty continues.
What are the consequences of a company trading whilst insolvent?
- Directors may be liable for wrongful trading where the company continued trading at a time when they knew (or should have known) that there was no reasonable prospect of the company avoiding insolvency, and they failed to take every step a reasonably diligent person could be expected to take to minimise the loss.
- Fraudulent trading occurs if it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose. It may be sufficient to show that a company continued to carry on business and to incur debts at a time when there was, to the knowledge of the directors, no reasonable prospect of those debts being paid. Fraudulent trading is also a criminal offence, punishable by a fine or imprisonment.
What can directors do to mitigate the risk?
- Review the ongoing financial position of the company in the light of the crisis.
- Keep detailed written records of all board meeting decisions.
- Seek advice from insolvency practitioners and lawyers.
- Ensure they can justify their actions, to promote the success of the company.
If you are a director of a company affected by the pandemic, then our corporate team is available to offer support and further guidance.
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700