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Testing Times – Directors’ Duties

Rupert Wright, a corporate services specialist with law firm, Charles Lucas & Marshall, says company directors need to be aware of their responsibilities and liabilities – should their business get into financial difficulty.

As the economy emerges out of recession, many companies are facing difficult trading conditions. It is therefore important that all directors are aware of their liabilities and take regular legal advice, particularly if a company is on the margin of trading solvently.

While a company is trading solvently, the duties of the directors are owed to the company for the benefit of present and future shareholders.  The directors will be operating on the basis that in making profits for the benefit of the company and its shareholders, there will be sufficient funds generated or available to the company to meet all liabilities to creditors as they fall due.

However, once a company becomes insolvent or there is doubtful solvency, the directors must act in the interests of the company’s creditors in order to minimise the potential loss to them.

The duties of the directors can be divided into common law, statutory and regulatory.

A breach of these duties can lead to personal liability and possible disqualification from being able to act as a director or being involved in the management of the company.  The duties will normally arise when the company is in financial difficulties based on a cashflow or balance sheet test.

Cashflow problems can arise if there are insufficient funds being received by the company to meet its liabilities as they fall due.  The balance sheet test arises if at any time the directors are aware that on a book or market valuation basis, the accounts of the company show that its liabilities exceed its assets.

As soon as the directors become aware of any of these difficulties, they should seek professional advice principally from the company’s lawyers and also possibly from a licensed insolvency practitioner.

The common law duty of directors when a company is on the margin of trading insolvently is to act in the interests of the creditors.

There are also various statutory and regulatory duties.  Fraudulent trading can arise when directors of a company allow it to incur debt when they know there is no good reason for thinking that funds will be available to repay the amount owed.

Apart from the risk of incurring personal liability where a director engages in fraudulent or wrongful trading or has been found guilty of other misconduct, he may also be disqualified by court order.

Various vulnerable transactions also need to be considered, particularly where preference is given to a creditor or a guarantor or surety of the company’s debts.  Any such transaction may be set aside.

In summary, in these testing times, directors should keep in regular contact with their legal advisers in order to avoid personal liability or possible disqualification.

For further information contact Rupert Wright on 01635 521212 or

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Rupert Wright
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Rupert Wright

January 19th, 2011 at 12:22 pm

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