Lees Solicitors - Directors' liabilities in a downturn: future planning - Ian MacGregor

Business Services News

Directors' liabilities in a downturn: future planning - Ian MacGregor


Directors' liabilities in a downturn: future planning - Ian MacGregor

The current difficult economic conditions make it more difficult for company directors to plan ahead and they need to take certain practical steps to ensure they fulfil their duties and to protect themselves.

Directors' duties

The nature and scope of directors' duties under English law are now codified under the Companies Act 2006. There is now a new duty to promote the success of the company for the benefit of its shareholders which particularly needs to be borne in mind in the current financial climate.

For directors of firms regulated by the Financial Services Authority (FSA), there are more worries. The FSA will in future scrutinise the attitudes and abilities of the individuals charged with the governance of the company. Therefore the competence of senior management and non-executive directors in their functions will be key.

Insolvency

If the company enters a formal insolvency process, the directors' conduct of the business of the company during the period when the company starts to encounter financial difficulties will be closely examined. Duties, which were previously owed to the company alone, now change and encompass the creditors as well. In practical terms, in running the business, the directors should look on the creditors' interests as paramount from this point forward as the directors may be at risk of wrongful trading, misfeasance, fraudulent trading, and the powers of office holders to require directors' co-operation, and to investigate and examine them.

Directors' and officers' liability insurance

It is very important in the current economic climate that companies and their directors give close consideration to whether the company will indemnify its directors and, if so, on what terms, and whether directors' and officers' (D&O) liability insurance will be bought by the company for the benefit of its directors.

Most D&O insurance policies provide cover for former, as well as current, directors and officers of companies. However, they respond to claims made and notified in the policy period, generally irrespective of the date on which the act complained of occurred. The effect of this is that directors, particularly retired directors, will not be in a position to influence whether insurance is obtained, and may well not even know if there is D&O insurance available to protect them.

Directors are appointed to promote the success of their companies and to preserve, protect and grow their investments for the benefit of the company's shareholders. They are expected to do more than react to economic conditions and they need to anticipate potential difficulties that lie ahead in their business planning and to meet those challenges if and when they arise.

If you are a company director and need any legal advice or assistance on your duties or in planning any special projects for your business contact Jon Bloor of our corporate team on 0151 647 9381.

 

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.


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