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

• Published date: 04 June 2020
• Author: Mr Andrew Mills and Paul Durban
• 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...