UK: Minutes & Management Accounts; Avoiding Personal Liability

Last Updated: 25 April 2002
Article by Paul Taylor

The courts continue to clarify the level of performance expected of directors who have presided over the downfall of their company.

In the recent case of Re Continental Assurance, the liquidator of Continental brought wrongful trading claims against all of Continental’s directors. The liquidator was seeking an order that the directors should contribute personally towards the asset base of the company.

Critical Date

A liquidator has a difficult decision to make as he needs to decide on a "critical date" (which cannot be changed) when the directors knew, or ought to have reasonably concluded, that the company could not have avoided an insolvent winding up. The court applies a subjective and objective test based on the actual knowledge and expertise of the director but also having regard to a reasonable standard of competence and knowledge. If the liquidator is conservative and chooses a critical date a few weeks before the onset of liquidation, it is relatively easy to prove insolvency but the courts will tend to order a lower contribution based on liabilities taken on after that date. Accordingly, if an earlier date is selected, it will normally be more difficult to prove insolvency but, if successful, larger contribution awards will follow.

In the Continental case, the liquidator chose the date of a board meeting several months before liquidation. Minutes had been kept of the meeting which showed that the directors reviewed management accounts; expressed concerns about solvency and then decided to continue to trade (for a variety of reasons including a possible future sale of the business).

The liquidator sought to argue that the accounting policies behind the management accounts were flawed and the directors ought to have realised this. He also disputed whether the directors could take into account a future sale.

Judgment

Directors will be heartened to hear that the judge rejected the liquidator's arguments. He noted from the minutes that the directors had objectively reviewed the likelihood of a sale and also questioned the finance director on the management accounts. It was held to be unrealistic to expect directors to also review accounting policies; such questions being more relevant to a professional negligence claim against the company’s accountants. Interestingly, the finance director had settled his claim before court so we do not have a decision on whether the finance director alone would have been liable in such circumstances.

Summary

The case certainly is no blank cheque for directors as, this decision could have been different, if minutes has not been kept or if they showed a slavish devotion to the executive directors.

In times of difficulties, directors must ensure that they act, and are seen to act, at all times to protect the creditors' interests. Honest, open and minuted discussions about how this is best achieved should be a priority. Directors should ensure that regular management information is presented before them and that they meet regularly as the position deteriorates. Any decision to continue to trade must be clearly backed up by justifiable evidence. Taking the right professional advice is also critical.

Postscript

As well as personal liability, a director could also be the subject of a disqualification order pursuant to the Company Directors Disqualification Act 1986. Recent figures just published show that there has been a marked increase in directors disqualified from the future management of companies. Of particular interest is the recent introduction of disqualification undertakings in April 2001. Nearly 60% of disqualifications are on the basis of such undertakings (where delinquent directors realise that a voluntary undertaking is likely to be quicker, cheaper and less stressful than undergoing a trial).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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