A timely reminder to understand Directors’ Duties in insolvency

 

Business insolvency and Directors' DutiesThe collapse of Carillion into liquidation with total liabilities estimated as likely to be in excess of £5 billion is a timely warning to all company directors to know and understand their duties when a company is insolvent.

Many of these are statutory and are mainly to be found in the Insolvency Acts, 1986 and 2000, and the Companies Act 2006. In essence, they are designed to ensure that in such circumstances directors put the interests of the creditors and employees ahead of the company and take decisions that minimise any loss to them due to a shortfall.

It has been estimated that unsecured creditors are likely to receive less than one pence for every £Sterling that they are owed.

Everyone wants to know why and how the situation at Carillion deteriorated so far and whether the directors fulfilled their duties. Within days of its collapse, investigations were announced by the Insolvency Service into the role and remuneration of former and current directors.

The Financial Reporting Council (FRC) is to also investigate the conduct of Carillion’s auditors for the years 2014, 2015 and 2016.

The implications of not complying with Directors’ Duties

It will be some time before the outcomes of the investigations in Carillion’s case will be known but all directors should be aware that, if proven, failure to observe Directors’ Duties comes with significant consequences including the prospect of being held personally liable.

Under the Insolvency Act 1986 directors “should ensure that they obtain regular updates as to of the company’s general financial position to ensure that they are kept fully aware at all times of the solvency or potential insolvency of the company. When the company is made or becomes insolvent the directors must recognise their duty to the company’s creditors, including current, future and contingent creditors.”

If it is deemed that they ought to have known there was no reasonable prospect of avoiding insolvent liquidation they should therefore have done nothing by way of trading that could leave the company worse off.

Understandably, there may be conflicts of interests for directors in this situation, in that they may want to minimise their own liabilities, especially if they have signed personal guarantees as directors.

There is also likely to be a strong desire to try to keep the company alive.

However, if contemplating a decision to carry on trading in the hope of helping their company to survive I would advocate that directors should take advice and engage a restructuring and turnaround specialist who can advise on the proposed actions and help them comply with their duties.

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