Directors take care

Directors take care

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Author: Susan Way

We now have recent guidelines to help interpret two of the Companies Act statutory duties of directors: the s172 duty to promote the success of the company and the s171 duty to exercise powers for the purposes for which they were conferred.

In Hellard & Ors v Carvalho the claimants were the liquidators of an insolvent company previously run by Mr Carvalho (C), its principal director. They brought proceedings under the 'misfeasance' procedure of the Insolvency Act 1986 for breach of duties and sought financial relief against C.

The judge found that C chose which creditors to pay and which to leave exposed to the real risk (as it turned out) of being left high and dry. It probably didn't help C's case that the payments included repayment of debts owed to his father, payments made to himself and to companies personally controlled by him and Christmas bonuses made to a key employee.

Companies at risk

Whilst the company is solvent directors must under s172 act in a way which they consider, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole.

Directors of companies at risk of becoming insolvent have a more difficult balancing act to pull off. They are not free to take action which puts at real risk the creditors' prospects of being paid, without having considered their interests first, rather than those of the company and its shareholders. Established, definite insolvency before the action or the dealing in question is not a prerequisite for a duty to consider the interest of creditors to arise.

Whether the duty to consider the interests of creditors arises is usually a subjective one - did the directors actually know that the company was insolvent or of doubtful solvency and which creditors did they know about? However where - as here - there is no evidence that the director actually considered the best interests of the company at all, the proper test is objective.

Should we write it down?

Courts take a dim view of directors who don't keep adequate records of their decisions or who skimp on the paperwork. Here, the judge referred to the principle that "persons who have conducted the affairs of limited companies with a high degree of informality cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available".

He found that an intelligent and honest man in the position of the director concerned couldn't have reasonably believed that the payments were for the company's benefit.

Following from that he also found that C was in breach of s171 in that C had not, in making the payments, exercised the powers he had as director for the purpose for which they were given. C was ordered to pay substantial sums back to the company.

Where a board or a director is concerned about the solvency of their company they must keep the situation under constant review, ensure their deliberations are recorded and take urgent legal advice.

About the author

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Susan Way

Professional Support Lawyer

03700 86 8919

Susan is an experienced professional support lawyer who has advised on corporate governance and compliance, equity capital markets and mergers and acquisitions.

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