Directors and insolvency—roles, powers and duties
Directors and insolvency—roles, powers and duties

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • Directors and insolvency—roles, powers and duties
  • General duties of directors—the IA 1986 and the Companies Act 2006
  • Duties and liabilities of directors of companies in financial difficulties
  • Voidable transactions
  • Director disqualification orders
  • Practical steps in an insolvency situation

Directors of companies which become, or are likely to become, insolvent are under a duty to maximise the return to the company’s creditors. The relevant statutory provisions are contained in:

  1. the Insolvency Act 1986 (IA 1986), and

  2. the Company Directors Disqualification Act 1986 (CDDA 1986)

General duties of directors—the IA 1986 and the Companies Act 2006

The Companies Act 2006 (CA 2006) codifies most, but not all of the duties imposed on directors by case law and equitable principles. There are seven general duties, of which three are most relevant to companies in financial difficulties:

  1. the duty to promote the success of the company for the benefit of its members as a whole

  2. the duty to exercise independent judgment, and

  3. the duty to exercise reasonable care, skill and diligence

In general, the statutory provisions and legal duties applicable to directors referred to in this Practice Note apply equally to shadow directors. For more information see Practice Notes: Directors' duties—directors' conduct: CA 2006, ss 171–174 and Directors' duties—nature, scope, interpretation and application.

Duties and liabilities of directors of companies in financial difficulties

When a company becomes financially distressed, and formal insolvency proceedings become more likely, the directors’ duty to promote the company’s success (ie to act in the interests of the members as a whole) falls away and is replaced by