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BLOG: Directors duties and insolvency

Images by Gareth Jones

In these difficult times many business owners are struggling to keep their businesses afloat. Some are uncertain whether they should close, or carry on in the hope that income will be restored to sustainable levels.

Morecrofts commercial partner Donal Bannon gives a helpful reminder to directors of their duties to the company.

All directors of a company owe statutory duties to the company, as set out in sections 171 to 177 of the Companies Act 2006.   It is important that they make sure they know what their duties are and continue to comply with them, even if they are dealing in crisis mode.  Directors who have furloughed themselves because their companies are not trading are still permitted to do whatever is required to fulfil their duties as directors, and should make sure that they do.

If a company is required to have an AGM, for example, can this be done remotely by video conferencing?  There seem to be solutions for everything using technology, so directors should not bury their heads in the sand but instead find solutions to fulfil their obligations.

Directors are required to promote the success of the company within the meaning of section 172 of the Companies Act 2006.  For example, extracting too much cash from the business could make it more likely that the company will be unable to pay its debts, with the consequences that the company’s employees could lose their employment, suppliers to the company would remain unpaid and ultimately the company would have to enter into an insolvency procedure.

If it becomes clear that insolvency is inevitable, the duty to protect the creditors’ interests prevails over any other consideration.

The Government has indicated that they will take a more lenient approach to companies trading or despite being possibly insolvent for a brief period during the current pandemic. If it becomes clear that the business cannot realistically survive, even with the Government loans and grants currently available, then it may be time to consider placing the company into an insolvency procedure.  Company directors, like all business owners, should be looking now at what they can forecast for the future and planning strategically, hopefully for the continuance of their business, but otherwise looking to what remedies they have to close down and the steps they might have to take, if the worst happens.

As in all situations, forward planning is the key.  No-one is able to predict the future and extent and longevity of the economic effects of the pandemic.  However now that the initial panic of the crisis has subsided, this should be an opportune time for business owners to look to the future and what it may hold for their business, and plan accordingly for the various options available to them.

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