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Directors duties Taylor Wessing

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Directors duties Taylor Wessing Powered By Docstoc
					Directors’ duties
Contents
Overview ................................................................................................................... 03
Powers and authority .............................................................................................. 03
General duties........................................................................................................... 04
Other statutory requirements and restrictions ..................................................... 07
Personal liability ........................................................................................................ 08
Corruption and Bribery ............................................................................................ 09
Health and Safety .................................................................................................... 11
Insolvency ................................................................................................................. 12
Disqualification.......................................................................................................... 13
Relief from liability, indemnity and insurance ........................................................ 14
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Overview
Becoming a director gives status and a direct impact on the strategy and success of a business.
How free is a director to act alone? What obligations and duties should a director bear in mind?

This note summarises the general duties and potential liabilities of a director of an English private
company (which is not in a group with a PLC).

Day-to-day management of a company is delegated to the directors by its shareholders.
Directors are initially appointed by the shareholders and can usually themselves appoint additional
directors up to any limit set by the articles of association.

The decisions of the directors are taken collectively by the board of directors. A director cannot
act as a director on his own unless only one director has been appointed. Decisions are either
taken by majority vote at board meetings or by the signing by all the directors of a written
resolution.

The director’s role and his powers are primarily defined in the company’s articles and, if he is also
an employee, in his service contract.

The mere fact of appointment does not normally give a director any executive powers. Most
directors are, however, also employees of the company with specific powers delegated to them.
A managing director usually has extensive powers to take day-to-day decisions on behalf of the
company. Other directors such as sales directors or finance directors will have a more limited
role.

Directors owe a duty to the company and, if insolvency threatens, to creditors.

Certain key duties of directors have been placed on a statutory footing under the Companies Act
2006 (the “Act”). These duties are owed to the company. See Duties.

Directors are also subject to a number of other statutory requirements and restrictions. These
include a duty to keep proper books and records and restrictions on entering into certain
transactions with the company or accepting loans from the company. Breach of these duties
and requirements can result in a director being disqualified from acting as a director and in many
cases can lead to the director incurring personal liability. Insurance can be obtained to cover
some cases of personal liability.


Powers and authority
The board
The directors act as a board but the board may (if the articles permit, as they generally will)
delegate powers to a committee of board members or to an individual director.

Non-executive directors
Non-executive directors are, as their name implies, directors to whom no executive powers have
been granted by the board. Although they have no executive powers, they can vote at board
meetings and have the same duties as executive directors.

Executive directors
Executive directors are generally employees with specific powers delegated to them either by a
resolution of the board or under their service contracts.

Managing director
Most companies have a managing director (sometimes called a chief executive). He is granted
more extensive executive powers by the company’s articles or by board resolution.
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              Exceeding authority
              Directors should not act outside the scope of the powers delegated to them. Major contracts
              and commitments should always be authorised by board resolution. A director who exceeds
              his powers (for example, by signing a contract not authorised by the board) may incur personal
              liability for the performance of the company’s obligations under that contract. However, he will
              be relieved from such personal liability if the board subsequently ratifies his actions.

              If a director is liable for conduct amounting to negligence, breach of duty, default or breach of
              trust, the power to ratify such conduct lies with the shareholders. The shareholder resolution
              ratifying such conduct must be passed without counting the votes of the director concerned (if
              a shareholder) or those of any connected person.


              General duties
              A director’s general duties are owed to the company and not to individual shareholders. The Act
              codifies certain key duties, as follows:

              Duty to act within powers (section 171)
              A director must act in accordance with the company’s constitution (which includes its articles
              of association and shareholder resolutions) and must only exercise his powers for their proper
              purpose.

              Duty to promote the success of the company (section 172)
              A director must act in the way he considers, in good faith, would be most likely to promote the
              success of the company for the benefit of its members as a whole. In doing so, the director
              must have regard (amongst other matters) to:

              „  the likely consequences of a decision in the long term;
              „ the interests of the company’s employees;

              „ the need to foster the company’s business relationships with suppliers, customers and
                 others;
              „ the impact of the company’s operations on the community and the environment;

              „ the desirability of the company maintaining a reputation for high standards of business
                 conduct; and
              „ the need to act fairly as between the members of the company.

              Directors must exercise reasonable care, skill and diligence in having regard to this non-
              exhaustive list of factors, which may sometimes conflict with each other, but the overriding
              consideration is the success of the company. This duty is subject to the existing common law
              duty to creditors which will override almost all other interests if the company is, or is at risk of
              becoming insolvent.

              Duty to exercise independent judgment (section 173)
              A director must exercise independent judgment. This duty does not prevent a director from
              acting in accordance with an agreement entered into by the company or in a way authorised by
              the company’s articles of association. Directors may continue to delegate certain matters to
              other directors or employees with specialist expertise, but must exercise independent judgment
              in deciding to delegate and in deciding whether or not to follow their advice.

              Duty to exercise reasonable care, skill and diligence (section 174)
              A director owes a duty of skill and care to the company. The degree of care required is the
              standard of care which a person would exercise on his own behalf.

              A director must exercise the care, skill and diligence which would be exercised by a reasonably
              diligent person with both:
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„  the general knowledge, skill and experience that may reasonably be expected of a person
   performing the functions carried out by the director in relation to the company; and
„ the general knowledge, skill and experience that the director actually has.

Therefore, the degree of skill required is that which would be expected of a person with the
director’s knowledge and experience. Where a director has particular skill or experience, such as
a professional qualification, the standard expected of him will be higher than that required of a
person without such skill or experience.

Duty to avoid conflicts of interest (section 175)
A director must not, without the company’s consent, place himself in a position where there
is a conflict, or possible conflict, either directly or indirectly, between the duties he owes the
company and either his personal interests or other duties he owes to a third party. That applies,
in particular, to the exploitation of property, information or opportunities, and whether or not the
company could take advantage of the property, information or opportunity.

The duty to avoid conflicts of interest will continue to apply after a person ceases to be a
director as regards the exploitation of any property, information or opportunity of which he
became aware when he was a director.

This duty does not apply to a conflict of interest arising in relation to a transaction or
arrangement with the company.

The duty in section 175 will not be infringed:

„  if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest;
„  in the case of a private company formed on or after 1 October 2008, if authorisation has
   been given by directors who are genuinely independent (in the sense that they have no
   direct or indirect interest in the transaction), unless the company’s constitution prevents such
   authorisation; or
„ in the case of a private company formed before 1 October 2008, if authorisation has been
   given by the independent directors (provided the members have resolved that authorisation
   may be given in accordance with the provision).
Board authorisation will only be effective if the required quorum is met without counting the
director in question or any other interested director and if the conflicted directors have not
participated in the taking of the decision or if the decision would have been valid without the
participation of the conflicted directors.

The members of a company may, in principle, authorise conflicts of interest that would otherwise
be a breach of this duty; also the company’s articles may, in principle, contain provisions for
dealing with conflicts.

Duty not to accept benefits from third parties (section 176)
Directors must not accept any benefit (including a bribe) from a third party which is conferred
because of his being a director or his doing or not doing anything as a director. This therefore
prohibits the exploitation of the position of director for personal benefit.

The duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded
as likely to give rise to a conflict of interest. Benefits conferred by the company, its holding
company or subsidiaries, and benefits received from a person who provides the director’s
services to the company, are excluded.

The members of a company may, in principle, authorise the acceptance of benefits that would
otherwise be a breach of this duty; also the company’s articles may, in principle, contain
provisions for dealing with conflicts.

The duty will continue to apply after a person ceases to be a director in relation to things done or
omitted by him before he ceased to be a director.
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              Duty to declare interest in proposed transaction or arrangement (sections 177 to 185)
              A director must disclose any interest in a proposed transaction or arrangement (section 177) or
              an existing transaction or arrangement (section 182).

              Under section 177, if a director is directly or indirectly interested in a proposed transaction or
              arrangement with the company he must declare the nature and extent of that interest to the
              board before the company enters into that transaction or arrangement.

              Existing transactions and arrangements are covered by section 182, which provides that a
              director must declare the nature and extent of his direct or indirect interest in an existing
              transaction or arrangement entered into by the company, to the extent that the interest has not
              been declared under section 177.

              Where a declaration of interest under section 177 or section 182 proves to be, or becomes
              inaccurate or incomplete, a further declaration must be made.

              It should be noted that the Act treats the obligation to declare interests in proposed transactions
              or arrangements as a fiduciary duty, carrying civil consequences for breach, including the
              possible unenforceability of the transaction by the director and a duty of the director to
              account for any profits. By contrast, the Act treats the obligation to declare interests in existing
              transactions or arrangements as a statutory duty where breach is a criminal offence but does
              not of itself affect enforceability.

              How should a declaration of interest be made?

              The procedure by which the director has to make the declaration is the same under both
              section 177 and section 182 and there are three different methods by which the declaration can
              be made. (Section 177 also leaves open the possibility that a director could declare his interest
              in a proposed transaction in another way.) The three specified methods are:

              „   at a board meeting;
              „   by written notice sent to the other directors or sent in hard copy form (or, if the recipient
                  has agreed, in electronic form) or sent by hand or by post (or, if the recipient has agreed, by
                  electronic means). The notice will be deemed to form part of the proceedings at the next
                  board meeting and, therefore, it must be minuted at the next board meeting;
              „   by a general notice in which the director must state the nature and extent of the interest
                  in the company or firm or the nature of the connection with the specified person. That
                  general notice will not be effective unless it is given at a board meeting or the director takes
                  reasonable steps to ensure that it is brought up and read at the next board meeting. Simply
                  sending in a general notice is not enough; the director has to present it at the board meeting
                  or make sure it is raised at the next board meeting.

              When is a declaration not required?

              A declaration under section 177 or section 182 is not required in four circumstances:

                  „   if the director is not aware of the interest or the arrangement in question (but bear in
                      mind he will be treated as being aware of the matters of which he ought reasonably to be
                      aware);
                  „   if the matter cannot reasonably be regarded as being likely to give rise to a conflict of
                      interest;
                  „   to the extent that the other directors are aware of the matter giving rise to the conflict;
                      and
                  „   to the extent that it concerns terms of his service agreement which has been or will be
                      considered by the board or by a committee of the board.
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The interest of anyone connected with the director may be taken into account, so consideration
needs to be given to all family members and connected companies, etc. Therefore, steps should
be taken to make sure that anyone connected with the director is aware of the disclosure
obligations and is asked to notify the director as the potential conflict arises.

A director can give a general notice to the board of an interest in another company or firm,
or that he is connected with certain people, which will satisfy his requirement to make the
appropriate declaration.

Other (non-statutory) general duties
Other, non-statutory duties which a director may owe to a company include:

„   Duty not to misapply the company’s property

A director who has misapplied or taken anything belonging to the company, must return it or
compensate the company for the resulting loss. Where he has used the company’s money for
purposes which the company has not sanctioned, he must replace it, however honestly he may
have acted.

A director must not take for his own benefit or pass to a third party a business opportunity
which arises out of the company’s business.

„   Duty of confidentiality

A director owes a common law duty of confidentiality to the company of which he is a director.
This duty overlaps with the statutory duties to promote the success of the company and to
avoid conflicts.

„   Authority exceeded

A director who causes the company to act beyond its powers will be guilty of misfeasance and
will be personally liable to the company for any resulting loss. Such acts will not be capable of
ratification. However, acts of a director which merely exceed the authority granted to him by the
articles or by resolution may be ratified by the shareholders. See Powers and authority.

A transaction to which a director or any person connected with a director is a party, and which
exceeds the authority granted by the articles, may be voidable by the company. Further, the
party to the transaction and any director who authorised the transaction will be liable to account
to the company for any profit made on the transaction and to indemnify the company against
any loss resulting from the transaction.

An act of a director carried out without authority is not always invalidated (for example, the issue
of shares, without authority from shareholders under section 550 or 551 of the Act, remains valid
although the director will be liable for permitting the issue).


Other statutory requirements and restrictions
Shareholders’ consent to be obtained for substantial property transactions
A director is required to obtain the consent of the shareholders of the company to any
substantial property transactions between the company and the director or any person
connected with the director (section 190 of the Act). The section applies to transactions
involving ‘non-cash assets’ of a value exceeding (a) £100,000 or (b) 10% of the company’s net
assets at the time the arrangement is entered into (whichever is less). Transactions involving
assets with a value of less than £5,000 are exempted from this provision.

Loans
A private company may not make a loan to a director (or director of its holding company) or
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              provide any guarantee or security for such a loan, without prior shareholder approval (section
              197 of the Act). If the director is also a director of the holding company, approval is also required
              from the shareholders of the company. No approval is required from the shareholders of a
              wholly owned subsidiary or of an overseas company. An arrangement in breach of this provision
              is voidable by the company, save for certain exceptions including:

              „  loans not exceeding a total of £10,000; and
              „  the provision of funds to enable a director to perform his or her duties; for example the
                 making of an advance to meet business expenses.
              (A private company which is the subsidiary of a public company is subject to some further
              restrictions.)

              Accounting records and duty to register documents
              Directors are required to keep accounting and other records which show with reasonable
              accuracy the financial position of the company. The directors must prepare annual accounts
              including a balance sheet, a profit and loss account and a directors’ report showing a true and
              fair view of the state of affairs of the company as at the end of the financial year.

              Once approved by the directors the accounts must be sent to all shareholders. There is no
              longer and statutory requirement to lay accounts for approval at a general meeting.

              The accounts must be filed with the Registrar of Companies within nine months of the end of
              each financial year. (Separate rules apply where the first accounting period ends more than 12
              months after the date of incorporation of the company.)

              The directors are also required to file an annual return each year, setting out details of the
              directors, secretary (if any), registered office, business activities and issued share capital of the
              company. The annual return must be filed within 28 days of the date to which it is made up
              (generally the anniversary of the date of incorporation).

              In addition, the directors are required to file numerous other documents including details of any
              change in the identity or details of the directors, secretary, registered office, issued share capital,
              special resolutions and certain other types of resolutions. There are prescribed time limits
              for each filing. Failure to comply with these time limits results in fines but does not of itself
              invalidate the underlying event.

              The directors are also responsible for ensuring that the company maintains its statutory books
              namely the register of directors, the register of secretaries, the register of members, the minute
              books, and the register of charges. Failure to do so may result in a fine, daily default fines and in
              severe cases, imprisonment.


              Personal liability
              In addition to the circumstances set out above in which a director may be required to account
              for monies received or to indemnify the company against losses incurred, a director may be
              personally liable:

              „   to a fine if the company does not comply with any of the requirements in The Companies
                  (Trading Disclosures) Regulations 2008 and fails to make the trading disclosures required
                  under those Regulations (Regulation 10 of The Companies (Trading Disclosures) Regulations
                  2008);
              „   on contracts signed by him purportedly on behalf of the company before its incorporation
                  (section 51 of the Act);
              „   if he acts in the management of the company while disqualified or acts on the instructions
                  of someone whom he knows to be disqualified (section 15 of the Company Directors
                  Disqualification Act 1986);
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„  if he has previously been director of a company which has gone into insolvent liquidation and
   is then concerned in the carrying on by another company of business under a name which is
   the same as or similar to the name used by the insolvent company within 12 months before it
   went into liquidation (section 217 of the Insolvency Act 1986);
„ if he has been served with a contribution notice by The Pensions Regulator on the grounds
   that he has been party to, or knowingly assisted in, an act or failure to act one of the main
   purposes of which was to remove or reduce the requirement or ability of an employer to
   pay a debt due under section 75 of the Pensions Act 1995 on the winding up of a pension
   scheme;
„ for damages if he makes a fraudulent or negligent misrepresentation in the course of
   negotiating a contract between the company and the third party;
„ under the criminal offence of making a false statement as to the affairs of the company with
   the intent of deceiving shareholders or creditors of a company (section 19 of the Theft Act
   1968);
„ under the criminal offences under the Fraud Act 2006 of dishonestly making a representation
   which is untrue or misleading where the person making it knows that it is, or might be,
   untrue or misleading and dishonestly failing to disclose to another person information which
   he is under a legal duty to disclose, both offences requiring the intention of making a gain or
   causing loss or risk of loss to another person (sections 2 and 3 of the Fraud Act 2006);
„ for imprisonment (up to 10 years) or a fine if he is knowingly party to the company carrying
   on its business with intent to defraud creditors of the company or of another person or for
   any fraudulent purpose (section 993 of the Act );
„ under a contract if he fails to make it clear that he is contracting as an agent of the company
   and not personally;
„ to a third party for damages for breach of an implied warranty of authority if he concludes a
   contract on behalf of the company but exceeds his authority in so doing and the company is
   therefore able to set the contract aside; or
„ in relation to wrongful trading or fraudulent trading by the company under the Insolvency Act
   1986 (see Insolvency).
A number of statutes contain provisions stating that if a company commits a criminal offence,
a director is also guilty of the offence if it is proved to have been committed with the consent
or connivance of, or to have been attributable to any neglect on the part of, the director. In this
context, ‘consent’ means being aware of what is going on and agreeing to it; and ‘connivance’
means knowledge together with a negligent failure to prevent. ‘Neglect’ implies that there is no
need for knowledge of the matters amounting to the offence, instead, there merely is a failure to
act when under a duty to do so.


Corruption and Bribery
Bribery Act 2010
The Bribery Act 2010 (“BA 2010”) came into force on 1 July 2011. It extends the crime of
bribery to cover all private sector transactions (previously, bribery offences were confined to
transactions involving public officials and their agents).

The BA 2010 creates four separate offences:

„   a general offence of offering, promising or giving a bribe (section 1);
„   a general offence of requesting, agreeing to receive or accepting a bribe (section 2);
„   a distinct offence of bribing a foreign public official to obtain or retain business (section 6);
    and
„   a strict liability offence for commercial organisations that fail to prevent bribery by those
    acting on their behalf, where the bribery was intended to obtain or retain a business
    advantage for the commercial organisation (section 7).
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              Potential liability of directors: offences under sections 1, 2 and 6

              Where a company (and not merely individuals acting on its behalf) is convicted of an offence
              under sections 1, 2 or 6 (offering, or receiving a bribe, or bribing a foreign public official), its
              directors can be held liable with the company. This is if it can be shown that they “consented”
              to or “connived” in the bribery. Whilst “consent” and “connivance” are not defined, it is thought
              these could mean, for example, being aware that there is a good chance that bribery is going on
              and doing nothing to investigate or put a stop to it.

              To be held liable, the director must have a close connection to the UK e.g. be a British citizen, an
              individual ordinarily resident in the UK or a British Overseas citizen.

              A director found guilty of any of these offences could face a maximum penalty of 10 years
              imprisonment and/or an unlimited fine. A director convicted of bribery could also face
              disqualification from holding a director position for up to 15 years.

              Potential liability of the company: section 7 offence

              The company will commit an offence if a person associated with it bribes another person for
              that company’s benefit, subject to the “adequate procedures” defence described below.

              Whether a person is “associated” with the company will be construed widely. A person will
              be “associated” with the company if it performs services for or on behalf of the company,
              regardless of the capacity in which they do so. This could therefore cover agents, employees,
              subsidiaries, intermediaries, joint venture partners and suppliers, all of whom could potentially
              render the company (and its group) guilty of this offence.

              Furthermore, this is a strict liability offence. This means that there is no need to prove a motive.
              The company can receive an unlimited fine if it is found that it is in breach of this section.

              The company has a defence if it can prove it had “adequate procedures” in place to prevent
              bribery. “Adequate procedures” are not defined in the BA 2010 but the Ministry of Justice
              has published guidance (“Guidance”) on what adequate procedures might involve. This
              guidance sets out six principles for companies to follow, which are designed to help businesses
              understand the sorts of procedures they might put in place to prevent bribery occurring within
              the company. These are:

              „  Proportionate procedures.
              „  Top – level commitment.
              „ Risk assessment.

              „ Due diligence.

              „ Communication (including training).

              „ Monitoring and review.

              Whilst this offence relates to the company rather than directors individually, the board needs
              to be happy with the company’s overall approach to preventing bribery. As well as a general
              risk assessment of the company’s business, it is likely that a review of the company’s current
              procedures, alongside the Guidance, will be necessary in order to implement measures that
              mean that the company is satisfied that it does have “adequate procedures” in place to prevent
              bribery.
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Health and Safety
Health and Safety at Work etc Act 1974
Responsibility for health and safety matters is a responsibility of the company rather than of
individual directors. However, where a ‘body corporate’ commits a health and safety offence
with the consent or connivance of a director or the offence is attributable to his neglect, then
he is liable to be prosecuted (section 37 of the Health and Safety at Work etc Act 1974). (In this
context, consent means knowing of the circumstances and the risks, whilst connivance means
knowing and not doing anything about the risks. Neglect means unreasonable breaching of
a duty of care.) If convicted, a director could be imprisoned for up to two years and fined an
unlimited amount (Schedule 3A to the Health and Safety at Work etc Act 1974) and a director
can also be disqualified from being a director for a period of time (section 2(1) of the Company
Directors Disqualification Act 1986).

Under the Health and Safety Executive (“HSE”)’s enforcement policy statement, one of its
purposes is to ensure directors are brought to account before the courts if they fail in their
health and safety responsibilities. HSE Inspectors have been asked to consider in particular
the management chain and role played by individuals in any health and safety breaches.
Organisations and individuals found guilty of health and safety breaches will be named in the
HSE’s annual report each year.

The HSE and the Institute of Directors have published guidance as to the health and safety
responsibilities of company directors, recommending that each board must:

„  accept its collective role in providing health and safety leadership in their organisation;
„ nominate a director to champion health and safety issues;

„ ensure that each member accepts individual responsibility and makes sure that their actions
   and decisions at work reinforce the messages in the board’s health and safety;
„ make sure all decisions reflect the intentions in the organisation’s health and safety policy;

„ encourage workers at all levels to become actively involved in health and safety; and

„ keep up to date with relevant health and safety risk management issues and review its health
   and safety performance regularly, at least annually.
The recommendations do not have statutory force but failure to implement them could well
be taken into account by prosecutors in deciding whether to bring criminal charges against
a director in the event of an accident. By contrast, implementation of the recommendations
should enable directors to demonstrate that they have complied with the law.

Manslaughter
Companies and individuals (including the directors and managers of a company) are subject to
the common law offence of manslaughter by gross negligence, which applies where (according
to R v Adomako [1994] 3 All ER 79):

„   the defendant owed a duty of care to the deceased;
„   there had been a breach of this duty of care; and
„ the breach was so grossly negligent that the defendant can be deemed to have had such
    disregard for the life of the deceased that the defendant’s conduct should be seen as
    criminal and deserving of punishment.
A conviction of an individual for gross negligence manslaughter carries a maximum sentence of
life imprisonment.

The Corporate Manslaughter and Corporate Homicide Act 2007 creates an offence of corporate
manslaughter (known as corporate homicide in Scotland) in the UK, which replaces the common
law offence of manslaughter by gross negligence for companies, partnerships, trade unions and
other organisations. An organisation will be guilty of corporate manslaughter if:
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              „  the way in which its activities are managed or organised causes a person’s death;
              „  the death results from a gross breach of a duty of care owed by the organisation to that
                 person; and
              „ the senior management had organised or managed the organisation’s activities in such a way
                 to be a substantial element of the breach.
              The Corporate Manslaughter and Corporate Homicide Act does not apply to individuals, but if
              found guilty an organisation will be subject to an unlimited fine.


              Insolvency
              The following provisions of the Insolvency Act 1986 need to be borne in mind by directors.
              Although they only apply when a company has gone into liquidation they relate to the conduct
              of the directors before the liquidation.

              Section 214 – Wrongful trading
              This section provides that a liquidator of an insolvent company may ask for an order from the
              courts making a director personally liable to contribute to the company’s assets. The liability will
              arise where a director knew or ought to have concluded that there was no reasonable prospect
              that the company would avoid going into insolvent liquidation and then failed to take every step
              with a view to minimising the potential loss to the company’s creditors that he ought to have
              taken.

              For the purposes of this section the facts which the person concerned ought to know or
              ascertain, the conclusions which he ought to reach and the steps which he ought to take are
              those which would be known, ascertained or taken by a reasonably diligent person having
              both the general knowledge, skill and experience that may reasonably be expected of a person
              carrying out the same function as is carried out by the director (an objective test) and the
              general knowledge, skill and experience which the relevant director actually has (a subjective
              test). The effect of this is that an experienced director in a large company with sophisticated
              accounting procedures and equipment will be required to conduct himself to a greater standard
              than an inexperienced director in a small company with simpler accounting procedures. But
              even the inexperienced director in a small company must make sure that he has adequate
              knowledge and skill and that the company’s accounting procedures and equipment are adequate
              to produce the information required to show its financial position. The section applies equally to
              non-executive directors as to executive directors.

              The dilemma facing a director of a company which is at significant risk of going into insolvent
              liquidation is whether to carry on trading or put the company into administration or liquidation
              or to invite the appointment of administrative receivers. The duty imposed is to minimise the
              loss to creditors and the steps to be taken will vary from case to case. A careful evaluation of
              the situation must be carried out with the aid of professional advisers (particularly insolvency
              practitioners) to establish the best course to take. All decisions taken and the reasons for them
              should be regularly recorded in board minutes. This section applies to any person who is or was
              a director of a company which subsequently goes into insolvent liquidation and it is not therefore
              possible to escape liability simply by resigning.

              Section 213 – Fraudulent trading
              Any person who is knowingly party to the carrying on of any business of the company with
              the intent to defraud creditors (including potential creditors) of the company or creditors of
              any other person or for any fraudulent purpose will be personally liable to contribute to the
              company’s assets. It has been held that an intent to defraud may be inferred if a person obtains
              credit when he knows that there is no good reason for thinking that funds will be available to
              pay the debt. However, there must be evidence to justify a finding of actual dishonesty. If this
              is proved then the director will, in addition to being liable to contribute to the company’s assets,
              be guilty of a criminal offence.
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Section 212 – Recovery for misfeasance
The official receiver, a liquidator, a creditor or a shareholder can recover money or damages from
officers of the company or those concerned in its management, who have misapplied or retained
or become liable or accountable for any money or property of the company, or have been guilty
of misfeasance or breach of fiduciary or other duties in relation to the company. This section
will cover, among other things, improper payments of dividends, application of monies for an
improper or unauthorised purpose, application of monies contrary to the Companies Acts, and
unauthorised loans or payments of unauthorised remuneration to its directors. It should be noted
that this section applies in addition to the rules relating to common law misfeasance (see, for
example, paragraph 3.4) but provides a speedier remedy than is available under the common law.

Sections 238 – Transactions at an undervalue
A transaction at an undervalue occurs when a company disposes of its assets for significantly
less than they are worth.

A liquidator can apply to have the transaction set aside if it occurred within two years of the
company’s liquidation.

Section 239 – Preferences
A preference is a transaction which has the effect of placing a creditor in a better position if the
company goes into liquidation than if the transaction had not occurred.

If the transaction occurs within six months before the company’s liquidation, the liquidator can
apply to have it set aside but he must prove that the directors in entering into the transaction
were influenced by a desire to produce the preferential effect.

In the case of a transaction with a creditor who is a connected person (for example any of the
company’s shareholders, subsidiaries or directors) the period of six months is extended to two
years and it is also presumed (unless the contrary can be proved) that there was a desire to
prefer the creditor.


Disqualification
A director faces disqualification:

„  for a maximum of five years for persistent default in various duties to submit documents to
   the Registrar of Companies; and
„ for a period of between two and 15 years under section 6 of the Company Directors
   Disqualification Act 1986 on the ground that he is unfit to be concerned in the management
   of a company. In determining unfitness the court considers (among other things) whether
   the director has been a party to the making of a preference, a transaction at an undervalue
   or to wrongful or fraudulent trading and whether he has failed to comply with the various
   duties relating to the keeping of books of account and the preparation of annual accounts or
   has breached any fiduciary or other duty owed to the company.
The disqualification will mean that the director will not be able to be involved in the formation,
promotion or management of any company in the United Kingdom during the disqualification
period.
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              Relief from liability, indemnity and insurance
              Relief in court proceedings
              A court may relieve a director, either wholly or in part, from liability arising from negligence,
              default, breach of duty or breach of trust, if it concludes that he ‘acted honestly and reasonably,
              and that having regard to all the circumstances of the case (including those connected with his
              appointment) he ought fairly to be excused’. This section does not apply to liability for wrongful
              trading.

              Indemnity
              A company is permitted to indemnify a director against liability incurred;

              „  in defending civil proceedings brought against him by third parties; or by the company or a
                 group company where judgment is given in favour of the director; or
              „ in defending criminal or regulatory proceedings where the director is acquitted.

              „ Articles of association usually contain provision for such an indemnity.

              Insurance
              A company may obtain insurance against the liability of a director for negligence, default, breach
              of duty or breach of trust in relation to the company.



              Taylor Wessing LLP

              September 2011
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