Company Directors: Duties and Liabilities

Proceedings against delinquent directors are part of the daily routine of our court system.  Those who mismanage their companies can and do go to jail.  The importance of those involved in the management of companies understanding the duties imposed on them has never been greater. 

Introduction
The duties and liabilities now imposed on directors bear little resemblance to those they used to face.  It has become a very large and complex topic and the risks facing those involved in the management of companies are now a major concern.  Nowhere can directors find an authoritative list or statement of their duties.  Currently, there are about 1,000 statutory requirements affecting those involved in the management of companies.   

This leaflet summarises some of the key responsibilities of directors and highlights some points to consider.   

Key Points to Consider 
Directors should note that they:
• Can be personally liable for the debts of their company and personally liable for the consequences of decisions they make on behalf of their company. 
• Can be disqualified from again being involved in the management of companies for up to 15 years.

• Can be fined or even imprisoned for allowing a company to incur debts knowing they will not be paid.

• Cannot escape responsibility by leaving the running of a company to the other    directors or by claiming ignorance of the law.
 

Directors Duties 
Directors have a general duty to act in good faith, carefully and skilfully having proper regard to the long-term interests of the company and the best interests of its creditors and employees.  The directors' actions and decisions have to be in the interest of the company even if different to their personal interests or to the interests of the shareholders.   

Disqualification 
The court's power to disqualify individuals from being directly or indirectly involved in the management of companies (including a ban on being a director) is not new, but it is only recently that we have seen many thousands of disqualification orders made each year.     

Most arise because the receivers or liquidators handling insolvent liquidations must report to the D.T.I any behaviour of the company's directors that may make them unfit to be involved in the management of companies.  These reports often lead to court proceedings and bans preventing any involvement in the management of any company for between two and 15 years.  

Personal Liability 
There are many specific statutory provisions which can see directors personally liable for their company's debts.  The most commonly encountered allows a court to require a company director who has been in breach of any of his duties to pay its liquidator an amount seen as fair by the Judge.     Frequently, the director has had no personal benefit  - the court's power to penalise the delinquent directors exists as long as the company lost money because of what they did or what they failed to do.   

Whenever a company continues to trade when its directors ought to know the company could not avoid later going into liquidation, the directors can be required to make a payment to the company's liquidator as well as being fined or even imprisoned as a result of such wrongful trading.   Increasingly, directors face prosecution if they have not complied with the numerous statutory obligations imposed on them.  The Companies Act 1985 alone has over 100 provisions where a breach can lead to a prosecution.     

Directors should be able to minimise such risks by ensuring that they are fully aware of their company's business and financial affairs without leaving its management to others, and by taking early legal and accounting advice where their company is getting into financial difficulties.  

How Can Warners Help You? 
With increasing amounts of legislation the situation faced by company directors today is ever more complex. Warners can help to simplify the issues and advise your business on how to address any problems.    

During an in depth meeting, we can provide a legal health check for your company which will advise on specific concerns and provide detailed guidance on ways in which the risk of personal liability can be minimised.    For further information relating to any of the issues mentioned in this leaflet or for any other legal advice relating to your business, please contact one of our commercial lawyers