Directors Of Cash-squeezed And Distressed Companies ' 5 Liability Points To Note

• Published date: 04 June 2020
• Author: Mr Andrew Mills and Paul Durban
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: MJ Hudson

February's On Target covered dealings between directors and their companies, and concluded with a reference to acts that can be challenged in the unlikely event of administration or other insolvency process. How quickly circumstances change; two months later, even the healthiest of businesses are preserving cash and those 'unlikely' events are weighing heavily on the minds of directors, shareholders and creditors alike.

In that context, for the next three editions we are collaborating with our finance-focussed newsletter Collateral to cover topics that are of direct and urgent relevance, including what you need to be aware of in your existing debt facility, whether your financing bank could call on its loan, how you might approach bank renegotiations, and (in this edition) how directors might become personally liable if the company's prospects decline significantly.

1. Who is liable as a director?

Under the UK Companies Act a 'director' is anyone occupying the position of director, by whatever name called. The Companies Act makes no distinction between executive and non-executive directors. A 'director' will include a person who has been properly appointed in accordance with the company's constitution and notified to Companies House (a de jure director), but also anyone who acts as a director despite not being formally appointed or publicly recorded as such (a de facto director).

Liability can also attach to a third category of persons as if they were directors; so-called "shadow directors". Under the Companies Act a 'shadow director' is a person in accordance with whose directions or instructions the directors of the company are accustomed to act. In the context of a troubled company this categorisation can be worrying to, for example, a creditor or significant shareholder that has sufficient influence to (and in practice does) determine how the directors operate the company.

2. What are the relevant director's duties?

Under the Companies Act, a director must (among other things) act within his powers, promote the success of the company, exercise reasonable care, skill and diligence, and act independently, avoiding conflicts of interest and conflicts of duties. These duties are owed to the company, but there are mechanisms by which other parties, such as insolvency practitioners, shareholders and creditors, can enforce them or bring a claim for breach in the company's name.

In the context of a cash squeeze, attention is usually drawn to the second of...