Directors’ duties: companies in financial difficulties

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

  • Directors’ duties: companies in financial difficulties
  • General duties of directors—the IA 1986 and the Companies Act 2006
  • Duties and liabilities of directors of companies in financial difficulties
  • Misfeasance
  • Fraudulent trading
  • Wrongful trading
  • Voidable transactions
  • Joint and several liability of directors for tax debts
  • Director disqualification orders
  • Disqualification following liquidator's report
  • More...

Directors’ duties: companies in financial difficulties

Directors of companies which become, or are likely to become, insolvent face additional considerations and are under a duty to minimise losses 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)

For guidance on identifying companies in financial distress, see Practice Note: Companies in financial distress—how commercial practitioners can spot the warning signs.

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 statutory 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 save where stated otherwise. As to the liability of shadow directors, it was suggested in Re Bowlplex that a shadow director will not be liable where there is no relationship or causal link between the instruction which gives rise to the shadow directorship and the event

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