My previous articles focussed on seizing the opportunities economic challenges create, and minimising supply chain risks in the meantime. Economists report that in 2023 UK economic activity outperformed expectations, but the outlook remains uncertain. So, I now look at how to minimise your personal risks as a director in case the worst happens. By Frank Bouette, Partner and Head of the Restructuring and Insolvency Team at DMH Stallard
A tight labour market, services price inflation, and businesses passing on cost rises to consumers continue to create challenges. The Insolvency Service statistics for November 2023 confirmed 2,466 registered company insolvencies (December figures are due this month). This is 21% higher than in November 2022, and 7% higher than October 2023. It suggests business failures are increasing, and further challenges lie ahead for boards of directors.
Individual directors may be fatigued from the challenges of recent years, and lacking appetite to carry on. Some may find it all too daunting and decide to throw in the towel, and hand over to others. It’s easy to assume a director isn’t subject to any ongoing obligations or risks following their resignation (aside from any restrictive covenants), and that they can just walk away. Whilst an individual director’s general directors’ duties may end when they cease to be a director, there are some instances when they may find themselves still personally liable to claims post resignation.
The circumstances when a director may still find themselves personally liable after resigning include where – while in office as a director:
• they acted negligently or fraudulently, or in breach of their directors’ duties. If so, they can be held personally liable for any losses incurred by the company as a result. This applies whether or not the company goes bust, although insolvency often precipitates the issue as administrators and liquidators, more often than not, pursue these claims. However, other directors and shareholders can also pursue them against former directors on behalf of the company;
• they allowed the company to continue trading when they knew, or ought to have known, that there was no reasonable prospect of it avoiding insolvency, and they failed to take every practicable step to minimise the loss to creditors. This is known as wrongful trading;
• they put themselves in a position where their interests conflicted with those of the company, or they harmed its interests for their personal benefit. For example, by exploiting their position to benefit personally from company property, information or opportunities; and/or by diverting profits that the company would otherwise have benefited from;
• they accepted unauthorised benefits or payments from a third party; or
• they personally guaranteed company liabilities. Dependent on the guarantee terms they may remain liable for these regardless of whether or not they continue to be a director.
Even if a director resigns while the company is solvent, their conduct may still be investigated – and they may be open to claims – if it goes bust in the years following (generally the following three years). If the company goes bust and they are found to have contributed to the company’s failure prior to resigning, as well as claims for the above, they could also face disqualification from acting as a director of another company for up to 15 years under the Company Directors Disqualification Act 1986.
The key to minimising the risk is to ensure that, while you’re in office as a director, the company’s finances are properly managed, and to deal with any pressing matters (where you can). Practical steps you can take are:
• know what’s in the company’s constitution (and any related shareholder agreements) and that you comply with it;
• maintain accurate and up-to-date financial management information – it’s no good if it’s not current. Don’t wait until the year end accounts – it’s usually at least nine months out of date by then;
• prepare and regularly review and update business plans and forecasts;
• hold regular board meetings to review the business plan, the company’s finances, and other matters. Keep proper minutes of those meetings, and the reasons for decisions made. This will help spot potential problems early on, and enable decisions to be explained when they are questioned years down the line;
• take professional advice as and when you need it. The earlier you do so, the more options you’re likely to have.
The above is a general guide only. The expert team here at DMH Stallard is able and always happy to assist both boards and individual directors who need more tailored advice.
Frank Bouette is a Partner at DMH Stallard, who heads up the Restructuring and Insolvency Team. Frank is recognised as an expert in restructuring and insolvency law and one who provides decisive, practical solutions.
Please get in touch:
Tel: +44(0)1293 558554
E: Frank.bouette@dmhstallard.com
