UK: Directors Duties - the World of Leather/Uno Case

One of the heaviest responsibilities a turnaround consultant or insolvency practitioner bears is advising management whether they are justified in continuing to trade where a company is in financial distress and its survival is not certain.

The case of Uno where judgment was handed down on 30 April may provide some guidance.

In this case the directors of a substantial furniture business continued to trade on whilst investigating various possibilities for restructuring the business. These efforts were ultimately unsuccessful and the case was made more controversial by the fact that the company was taking deposits from customers and not placing these in a separate trust account.

In handing down his judgment, the Honourable Mr Justice Blackburn paid tribute to the directors' efforts to secure a corporate solution but made the point that this alone was not a ground for avoiding disqualification. He then, despite urgings to the contrary by the Disqualification Service, reiterated the principal that to justify disqualification there must be conduct which is either dishonest or lacking in commercial probity and furthermore this conduct must make the person unfit to be concerned in the management of a company. The Judge had no hesitation in saying that these grounds had not been made out in the case of the Uno directors.

The case will be of considerable comfort to those advising management and suggests that prudent management, guided by competent advisers, are justified in investigating realistic opportunities which might lead to the survival of the business.

The Disqualification Service's assertion that trading using creditor deposits is totally unacceptable appears to have been firmly knocked on the head. The position remains however that particular care needs to be exercised where customers are paying deposits in advance for goods which they may not receive.

One red herring raised by the case is a suggestion that directors in a distressed situation can have a positive duty to trade on whilst investigating whether some form of turnaround is possible. We suggest that whilst directors may be justified in taking a few days to investigate any unexpected crisis this does not extend to a positive duty to trade on even where survival is a possibility.

The case makes interesting reading and practitioners will recognise elements common to many turnaround situations. We understand that there is a possibility of an appeal and will update this advice should an appeal materialise.