Understanding your Duties as a Company 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. However, this is not a reason to delay dealing with your company’s financial affairs. In fact, putting off potential problems is likely to make matters worse.
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 will need to 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. This is commonly known as wrongful trading.
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 you require any further information, help or advice please do not hesitate to contact us for a no obligation discussion. Keywood Group is a Licenced Insolvency Practice with offices in Birmingham and London and our team has extensive experience in advising directors on their options.