Directors Dilemma

The directors of a company have all the powers to decide what will be done, when it will be done and how – but with that power goes the responsibility to the company and its shareholders, to the company’s creditors and last, but not least, to themselves.

The Responsibility to Others

As a director, whether that be as the sole director of a small company or one of many in a large company, you have duties imposed on you under legislation, such as the Companies Act 1993 (“the Act”), and the company’s constitution.

In any circumstances, you must firstly comply with the duties imposed by legislation, which are set out in sections 131 to 138A of the Act. Your first duty is to act in good faith and in what you believe to be the best interests of the company – not your own.

In tough times, if the company is insolvent, then the focus changes and you must act in the best interests of the company’s creditors by ensuring the company doesn’t incur debts and liabilities that it cannot pay.

If you do not fulfil your duties as a director, you could be held personally liable for those breaches and face monetary penalties or imprisonment and you could be ordered to contribute funds to the company to pay creditors.

Where you are the sole director, the thought process is simple.

  • Am I complying with my duties as a director? If the answer is “yes” then carry on. If the answer is “no” change what you are doing so that you do comply.
  • If the company is technically insolvent can it be rescued. If the answer is “yes”, then take the necessary actions to recover. If the answer is “no” then cease trading to avoid increasing the amount owed to creditors.

The Responsibility to Yourself

Where you are not the sole director, and your company is insolvent, then the thought process is the same but (and it’s a big but) being able to put into effect any actions you think are the correct and proper thing to do is dependent on the majority of directors agreeing with you.

If you do not get that agreement, you need to start making decisions about what is best for you personally.

"Should I Stay or Should I Go" is a song by English punk rock band the Clash and one of the verses is as follows -

Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know

The 3rd and 4th lines of the verse highlight the issue for you, as the director holding the minority view, of what you should do.

Do you remain as a director to try and bring about the changes you think are required to get the best results for the creditors of the company or do you accept the other directors will not change their point of view.

That is a decision for you to make, based on the circumstances of your company and on any professional advice you may take but, if you do not see any way that you can stop the company failing because the other directors won’t take the course you are proposing, there is no obligation on you to “go down with the ship”.

To protect yourself, you should keep good records of the events that occurred, the proposals you put to the Board and responses you received and seek independent professional advice.

 

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