UK: Directors´ Liabilities In Times Of Financial Difficulties

Last Updated: 12 November 2008
Article by Alasdair G. Peacock and Euan C. M. Tripp

Directors of companies need to be aware of the particular risks of trading through financially difficult times.

This short briefing focuses on the risk of directors incurring personal liability for their company's debts through wrongful trading and outlines some practical steps to mitigate that risk.

Given this and the risk of other potential liabilities, directors (including shadow directors) should seek external advice as soon as they are aware that the Company may be in financial difficulties (this step is endorsed by the UK Department for Business, Enterprise and Regulatory Reform.

Wrongful Trading

Wrongful trading occurs when directors incur debts or liabilities on behalf of the Company at a time when they knew or ought reasonably to have concluded that there was no reasonable prospect of the Company avoiding going into insolvent liquidation.

There is no requirement to show intent, dishonesty or fraud in order to establish liability. The consequences if liability for wrongful trading is established are:

  • the risk of personal liability; and
  • the risk that a disqualification order will be made against the director.

A director owes a duty to the Company to act in the best interests of the creditors of the Company if the Company is, or is on the verge of becoming, insolvent. His other duties (e.g. to promote the success of the Company for the benefit of its shareholders as a whole) are subject to this duty in favour of the creditors.

A director has a defence to a charge of wrongful trading if, once he knew (or ought in the circumstances to have concluded) that there was no reasonable prospect that the Company would avoid going into insolvent liquidation, he is able to demonstrate that he took every step with a view to minimising the potential loss to the Company's creditors as he ought to have taken.

The standards of skill and judgement expected of a director in judging the reasonableness of the prospects of the Company avoiding going into insolvent liquidation are those of a reasonably diligent person. This includes having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the director in relation to the Company and the general knowledge, skill and experience that he actually has.

Wrongful Trading - Practical Step

The following is a non-exhaustive list of steps that a director should take in order to minimise his risk of personal liability. However, professional advice should be sought in each case based on the particular circumstances.

  1. Seek external advice as soon as the director is aware that the Company is in financial difficulties. The advice that is sought and given should be minuted or otherwise properly recorded.
  2. Keep up to date with the Company's latest financial information at all times and be aware of its implications for the Company. Do not wait for an event to arise in order for problems to be highlighted. Instead be pro-active, for example by producing accurate cash flow projections and monitoring projected compliance with financial covenants in arrangements with funders.
  3. Hold regular Board Meetings and ensure that the decisions taken (and the reasoning behind those decisions) are fully recorded.
  4. Reach decisions independently taking into account the available legal and financial advice and information.
  5. Do not simply resign to avoid the issue. If fellow directors disagree with a director's more pessimistic views on the Company's prospects, resignation may be appropriate but advice should be taken and, again, the decisions taken (and the reasoning behind those decisions) should be fully recorded.
  6. If there is no reasonable prospect that the Company will avoid going into insolvent liquidation, take every step with a view to minimising the potential loss to the Company's creditors as the director ought to have taken. A director who is concerned about the steps that should be taken in these circumstances to protect him from liability should also seek specific legal advice in this respect.
  7. If a director believes that there is no reasonable prospect of the Company avoiding insolvency then he should immediately bring this to the attention of the Board and the Company should take independent advice as a matter of urgency. In these circumstances, almost without exception, the Company should not incur new liabilities unless and until it has been appropriately advised otherwise.

Other Potential Directors Liabilities

While the risk of wrongful trading is the most common concern, there are other issues that can also arise in difficult financial times. In brief, these include

  1. A director should be fully aware of the fiduciary duties he owes to his company and its various stakeholders. These now include the duties set out in the Companies Act 2006 such as a duty to act in good faith to promote the success of the company having regard to the company's employees, business relationships, community and environmental impact. Further information can be found here.
  2. A director should be cautious of giving any form of personal guarantees or of allowing his company to rely on personal guarantees without taking proper advice as to the implications.
  3. Directors of listed public companies should be familiar with the additional specific duties and obligations derived from the listing rules relating to the market upon which their company is listed.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions