The importance of understanding your duties as a director

If you are the director of a limited company you must perform various duties as set out in the Companies Act 2006.  You can employ people to manage some of these day-to-day tasks, or engage a professional such as an accountant.  Regardless of this, you remain at all times legally responsible for your company accounts, records and performance.

If you are a director of a company that is insolvent, there are additional obligations that you must meet in order to avoid personal liability. 

At Keywood Group we are often approached by directors of struggling businesses who are concerned about what impact company closure might have on them.  We provide clear and transparent advice so that director decisions can be taken with confidence. 

When could a director be personally liable?

A director (or former director) could be held responsible for transactions which undermine the position of company creditors.  Some examples are below but this list is not exhaustive:

• Repayment of an overdrawn loan account

Where a director has a loan account which is overdrawn (which means money owed to the company) this will be considered an asset of the company and must be repaid for the benefit of the company.

• Repayment of unlawful dividends

Many directors withdraw funds from their company which are then classified as salary or dividend at the year end.  However, dividend payments are only lawful when there are sufficient distributable reserves available to support them.  Where dividends have been paid in the absence of sufficient reserves, the dividend payment must be repaid.

• Misfeasance (Breach of duty)

Various parties can recover money from directors of the company (or those concerned in its management) who have misapplied, retained or become accountable in any way for company money or property.  The person liable can be compelled to repay monies, restore property or compensate the company accordingly.

• Personal guarantees

Where a director has provided a personal guarantee, he or she will be liable to make payment if the company itself cannot.  Many banks and other financial providers will require a personal guarantee before lending.

How can a director reduce the risk of personal liability?

If a company is insolvent or it is likely to become insolvent, a director can become personally liable for company debts if the company enters insolvent liquidation, and it can be shown that reasonable steps were not taken to prevent the position from worsening.  

For this reason, you should take early advice from a Licenced Insolvency Practitioner.  This gives reassurance that future decisions will mitigate risk, and the loss to company creditors.

For any company (whether facing closure or not), there are a number of practical steps which you can routinely take:

• Hold regular meetings to review the company’s financial position, and projections for the future.
• Document key decisions (such as the decision to continue trading) and the basis on which those decisions were made.
• Maintain and review management accounts and contrast these with any projections that have been prepared. If these differ significantly, consider whether the projections you have are realistic and achievable.

What if my business has been affected by Covid-19?

The Corporate Insolvency and Governance Act 2020 (“GIGA”) suspended wrongful trading provisions by requiring the court to assume that a person is not responsible for any worsening of the financial position of the company (or its creditors) that occurred during the relevant period between 1 March 2020 to 30 September 2020 and 26 November 2020 to 30 June 2021. 

Although this provides directors with some protection from liability, there many provisions were not suspended and therefore directors should act with caution.

If, throughout the pandemic, your company made claims under the Coronavirus Job Retention Scheme (“CJRS”) (also known as the furlough scheme) you should also consider any additional requirements to keep adequate records.

In accordance with the published guidance when the furlough scheme was introduced, “to be eligible for the grant employers must confirm in writing to their employee confirming that they have been furloughed.  If this is done in a way that is consistent with employment law, that consent is valid for the purposes of claiming through the scheme. Collective agreement reached between an employer and a trade union is also acceptable for the purpose of such a claim. There needs to be a written record, but the employee does not have to provide a written response. A record of this communication must be kept for five years.”

Without written evidence of a furlough agreement, the business is ineligible for furlough and must repay the amounts claimed.

Help from a Licenced Insolvency Practitioner

Keywood Group is a firm of Licenced Insolvency Practitioners with offices in Birmingham and London.  If you require any further information, help or advice please do not hesitate to contact us for a no obligation discussion.