Guide to Directors’ Duties and Responsibilities with specific emphasis on Business Survival
www.onlineturnaroundguru.com v5 A Practical Guide for SMEs prepared by The Online Turnaround Guru version © The Online Turnaround Guru 2018 å INSOLVENCY
The aim of this guide is to help you understand your duties and Contents responsibilities as the director of a company with particular emphasis on knowing if your company is Section Page insolvent and what to do if it is. 1. INTRODUCTION 3
If you have more pressing concerns 2. RESPONSIBILITIES 5 about your business than those covered by this guide then you should 3. WHO IS A DIRECTOR? 6 expect to find an appropriate solution 4. POWERS 10 or source of help on my website at www.onlineturnaroundguru.com. 5. DUTIES 11 6. LIABILITIES 13
7. INSOLVENCY 16 Insolvency 8. TRADING WHILE INSOLVENT 18
9. THINGS THAT DIRECTORS 21 SHOULD ALSO BE AWARE OF Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency
INTRODUCTION They say that “when the going gets tough, the tough get going” and this is especially true if you are a director trying to steer your businesses through difficult times.
01. Sitting back and doing nothing although the directors remain is not an option if you are fighting responsible for the statutory for survival. Declining sales, obligations being carried out. increasing costs, bank repayments, HMRC arrears, lease and finance This Guide includes notes on obligations, redundancy costs and relevant legislation that you need a withdrawal of credit terms all to be aware of and as a director contribute to a shortage of funds need to ensure are complied with. and the problem of having to juggle For example, did you realise that cash to meet creditor demands. the law does not discriminate between directors and ‘non- executive’ directors who, contrary So, how can this to popular myth, are just as accountable, should the company Guide help you? get into financial difficulty? Did you also know that your executives and Directors’ Responsibilities advisers can also be held liable for and Duties their actions if ever the company gets into financial difficulties? The key to saving a business is being realistic and knowing You also need to be aware of the what you can and can’t do. You seven ‘codified duties’, as set out need to be aware of the rules in the Companies Act 2006 that and regulations you are bound came into effect in 2008. Failure to by and what your duties and comply with these broad duties can responsibilities as a director are. result in you as a director incurring civil and/ or criminal liability, leading This Guide therefore outlines to a fine, and/ or imprisonment these duties and responsibilities and/ or disqualification for up to and should be read in conjunction 15 years. The Insolvency Act 1986 with another, related guide goes further as it requires directors (Guide to Company Secretarial of insolvent companies to act in Duties). The Guide to Company the best interests of creditors. Secretarial Duties covers your However, directors who seek and statutory obligations which are follow appropriate professional normally carried out by a company advice can avoid personal liability secretary on behalf of the directors if they act upon that advice. CONTINUED
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INTRODUCTION | CONTINUED
The Test for Insolvency Key advice
There are four primary tests to As a director you can risk determine whether your company everything you own if you fail is actually insolvent, which can be to seek advice when things get the case even if you still have a sticky. Despite the help provided strong balance sheet. The good in this Guide, are advised to news is that you can still trade while seek professional advice from a your company is insolvent providing solicitor, an insolvency practitioner that in doing so, you continue or a turnaround practitioner. to trade in the best interests of your company’s creditors. You might provide a copy of this Guide to your fellow directors as If your company is insolvent this part of their personal development Guide is intended to help you or their induction upon establish your objectives and appointment as a new director. offers guidelines in the form of continuance principles for you to follow if you do decide to trade while your company is insolvent.
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RESPONSIBILITIES
Governing legislation disqualification and/ or personal liability, including but not limited to: Directors’ duties are defined by: àà Insolvency Acts 1986 02. àà Common law; and 2000; àà Specific legislation such as the àà Enterprise Act 2002; codification contained within àà Company Directors’ the Companies Act 2006; Disqualification Act 1986; àà General Statutory àà Corporate Manslaughter and compliance including but Corporate Homicide Act 2007. by no means limited to: The board of directors of a company • Companies Act 2006; is primarily responsible for: • Health & Safety at Work etc Act 1974 and its àà determining the company’s subsequent Regulations; strategic objectives and policies; • Corporate Manslaughter àà monitoring progress and Corporate towards achieving the Homicide Act 2007; objectives and policies; • Employment Act 2008 and àà appointing senior management; its associated Regulations; àà ensuring accounts are up to • Competition Act 1998; date and that they are aware of the financial position; • Supply and Sale of Goods Act 1994; àà accounting for the company’s activities to relevant parties, • Data Protection Act including shareholders and 2018 and General Data filing with Companies House; Protection Regulations; àà compliance with • Money Laundering relevant legislation; Regulations 2007; àà statutory filings with • Anti-discrimination Companies House. legislation covered by Race and Framework Directives; The managing director/chief executive is responsible for the • Industry specific legislation. performance of the company, as In addition directors also need to be dictated by the board’s overall aware of a vast amount of legislation strategy. He/ she reports to the where breaches could lead to chairman or board of directors.
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WHO IS A DIRECTOR? A director, by whatever title, is one who is in practice responsible for the management of a company’s affairs. There is no comprehensive definition of 03. a director in statute, the only guidance given being that the term ‘director’ includes any person occupying the position of director, by whatever name called (Companies Act 2006, section 250).
For example, in some companies or corporate directors up to the management may be entrusted maximum number specified by the to ‘Executives’, ‘Governors’ or articles at an appropriate Board ‘Council Members’. Under this meeting. It should be noted that definition, they will be held to be unless the Articles require more, directors. Further, and separately, a limited liability company only the word director in some statutory needs to appoint one director provisions includes someone (subject to the proviso that that who is a de facto director or person is a natural person and shadow director, that is a person not a corporate director). who acts as a director without having been formally appointed. On appointment a new director is required by law to complete a Subject to certain exemptions form AP01 (or AP02 for corporate such as disqualification, directors) which requires certain bankruptcy or the company’s information to be filed and held auditor, anyone can be a director at Companies House along with provided they are over 16. his/ her signature on the form to signify consent to act as a director. Formal appointment Upon completion, the form should be filed with the Registrar of The first director(s) of a company Companies at Companies House. will be appointed at the time There are also provisions for filing of its registration. Subsequent these forms electronically by those appointments are governed by the companies who have registered company’s articles of association themselves for online filing. If there (Articles). Typically the Articles will is a share qualification specified in provide for the board of directors the Articles, then the director will (Board) to fill any vacancies or to also be required to acquire the appoint additional directors and/ appropriate number of shares.
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WHO IS A DIRECTOR? | CONTINUED
Upon appointment the new director’s details should be entered in the Other types Register of Directors. of director The director is required to disclose Non-executive director any interests in shares, loans or debentures with the company; It is important to appreciate that these should be entered in the there is no difference in law Register of Directors Interests. between the duties of ‘executive’ In addition the director should and ‘non-executive’ directors. An give notice of any interests in ‘executive director’ is regarded contracts or relationships with the as a director who has specific company or with other directors delegated responsibilities or employees of the company; within the company, normally these are normally recorded in management or operational board minutes upon appointment responsibilities. Directors are not and thereafter in subsequent required by law to give continuous minutes if there is a change. attention to company affairs unless their executive position so On a practical note, it is requires either by contract and/ or recommended that the new by the terms of their appointment. director should make sure that However, all directors, including he/ she familiarise themselves non-executive directors, should with the overall corporate makeup familiarise themselves with the and situation of the company by company’s affairs, including its seeking to obtain a copy of the financial position, and it is strongly company’s memorandum and recommended that they should articles of association, details attend meetings of the board, and of recent business and financial of any committee of the board affairs of the company including of which they are members, copies of recent board minutes and whenever they are reasonably management accounts; as well as able to do so and if not, to at least checking the statutory reports and ensure that they have seen a copy accounts for the past two years. of the minutes of the meeting. Crucially, legislation imposes a responsibility on all directors for discharging the duties of the board.
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WHO IS A DIRECTOR? | CONTINUED
Alternate director section 251) although the legislation provides that ‘a person is not An alternate director is someone deemed a shadow director only appointed by a director to by way of reason that the directors represent him/ her at a meeting act on advice given by him/ her in or to fulfil a specific responsibility a professional capacity’. It should on his/ her behalf. It is usually be stressed, however, that what is therefore only a limited and necessary is that the whole board temporary appointment. It may of directors acts under the direction however be a surprise to know that of this shadow director. Depending alternate directors are registered on the facts, it is quite possible as directors with Companies for a shareholder, bank, a lender House and their actions may be or bond holder, an executive, an scrutinised and almost certainly adviser or a ‘company doctor’ to will be in the event of insolvency. be found to be a shadow director although it is more often where Shadow director a particularly powerful individual controls the company without being Certain legislative provisions formally on the board. Where a concerning directors extend shadow director is itself a company, to what are known as ‘shadow it does not necessarily follow that directors’. A shadow director is directors of the corporate shadow a class of director distinct from director are themselves shadow actual appointed directors of the directors. Instead each such company. A ‘shadow director’ person’s own actions are looked at is defined as ‘a person in separately. There is much analysis accordance with whose directions of the term shadow director and or instructions the directors of a who constitutes a shadow director company are accustomed to act’ in case law as it is invariably (Companies Act 2006, section 251; decided on a case-by-case basis. CDDA86, section 22; and IA86,
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De facto director No distinction among directors in insolvency A de facto director is someone who is accepted by others as a In the event of a company entering director and whose actions are a formal insolvency procedure, all deemed to be those of a director the above directors are likely to even though they are not formally be the subject of investigation into appointed. When assessing the decision making and actions whether or not someone acted as of the board such that each and a de factor director, their authority every director can be held liable and approval of transactions that for not just their own actions, but are normally transactions that also those of other directors. require board approval is a crucial test. Executives and advisers and specifically those with titles like chief executive, chief finance officer, chief restructuring officer, turnaround adviser and other similar designations can be held to be de facto directors and their terms of engagement cannot contract them out of liability if their actions are deemed to be those of a director. While there is no difference in terms of personal liability, the distinction between a de facto director and a shadow director is based on the role as perceived by others where a de facto director holds himself/ herself out to others to be an executive officer of the company, such as chief executive, chief operating officer, chief finance officer or chief restructuring officer.
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POWERS The directors are generally responsible for the management of the company and they may exercise all the powers of the company.
04. The extent of their authority Generally, the directors must act will be defined in the Articles collectively as a Board to bind the of Association of the Company company. However, the Articles and relevant Companies legislation usually entitle the Board to delegate particularly within the Companies powers to individual directors as Act. For example, the Articles appropriate. In practice individual often include provisions and directors usually carry out many restrictions on borrowing by of the company’s activities. the company. Further obligations and limitations on their authority can be imposed on directors in a shareholders agreement. For example, the shareholders agreement specify regular reports and accounts to be provided to shareholders and require directors to obtain shareholder consent before entering into certain types of transaction such as granting security, finance agreements or capital expenditure.
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DUTIES Many of the duties and obligations of a director are mandated by the Companies Act 2006. It enshrines some principles that codify directors’ duties.
05. secretary specifically to carry out Codified duties those duties, there is no longer àà to act within powers as set out an obligation for a company to in the company’s Articles and appoint one. Whether or not a Memorandum of Association; company secretary has been àà to promote the success appointed, directors should make of the company; sure that someone is specifically appointed to carry out the àà to exercise independent equivalent duties on behalf of the judgment; company. This may be an individual àà to exercise reasonable within the company or someone care, skill and diligence; else or indeed a professional firm that specialises in providing àà to avoid conflicts of interest; company secretarial services. àà to not accept benefits from third parties; Statutory and other duties àà to declare any interest in àà a director must not put proposed arrangements himself/ herself in a position with the company. where the interests of the company conflict with his/ Directors are responsible for her personal interest or his/ making sure that the company fulfils her duty to a third party; its statutory duties. As the company secretary is normally the person àà a director must not make who will in practice be responsible a personal profit out of his for the performance of most of the position as a director unless compliance and regulatory duties he/ she is expressly permitted required by the Companies Act, it is to do so by the company; imperative that the directors ensure àà a director must act bona fide that the secretary is competent to in what he/ she considers is discharge those duties properly. in the interests of the company Although the majority of companies as a whole, and not for will have appointed a company any collateral purpose.
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DUTIES | CONTINUED
The primary duties and obligations of a balance sheet and a profit of a director referred to as the and loss account for each “codified duties” are set out as financial period of the company, seven general duties in sections 170 the presentation of these to to 181 of the Companies Act 2006. shareholders and, subject to various exemptions, the filing Other duties are governed of the accounts and report by the Insolvency Act 1986 of the directors with the and the Company Directors’ Registrar of Companies. Disqualification Act 1986. In addition to the above, on an Directors may become personally individual level, directors have liable for any penalties incurred a responsibility to disclose to the if the company fails to carry out board their interests in any dealings its statutory duties. However, with the company, in particular the legislation does provide a in respect of the following: defence for a director if he/ she had reasonable grounds to believe àà an interest in a contract that a competent person had with the company; been given the duty to ensure that àà interests in shares or the relevant statutory provisions debentures of the company; were properly complied with. àà dealings in options of the The main statutory responsibility shares of the company. falling on directors is the
preparation of the accounts Duty of skill and care and the report of the directors endorsing the preparation of the Directors are expected to display accounts. Failure to comply with a certain amount of skill and this can lead to disqualification. exercise reasonable care in the performance of their work. It is the responsibility of the directors to be aware of the financial position of the company at all times and to ensure that the company maintains full and accurate accounting records. This includes the preparation
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LIABILITIES Directors may incur personal liability, both civil and criminal, for their acts or omissions in directing the company.
There are various other matters for àà the director is found to 06. which directors can be held to be be guilty of wrongful or liable. Specifically, directors should fraudulent trading as be aware of the provisions of the defined in the Insolvency Company Directors’ Disqualification Act 1986 (see below). Act 1986, which could lead to A disqualified director cannot disqualification from acting as a act as a director, nor can he/ director of a company for a period she influence the running of of between two and fifteen years, a company or be involved in the Insolvency Act 1986 which gives the formation of a new one. rise to the possibility of directors being made personally liable for Insolvency Act 1986 (IA 86) the company’s debts, the Health and Safety at Work etc Act 1974, Under the following headings and the Corporate Manslaughter the court may require a director and Corporate Homicide Act 2007. to make a personal contribution to the company’s assets if, Company Directors’ in the course of the winding Disqualification Act 1986 up of a company the director is found guilty of: The circumstances in which an application may be made Wrongful trading (s214 IA 86) for the disqualification of a director are as follows: Where a director failed to take steps to minimising the potential àà the director has been guilty loss to creditors where he/ she of three or more defaults in knew or ought to have known complying with companies that there was no reasonable legislation regarding the prospect of avoiding insolvent filing of documents with the liquidation but continued to trade Registrar of Companies during as a result of which the company the preceding five years; is worse off. However, the director àà he or she is, or was, a director will not be made personally liable of a company that has at any in circumstances where he/ she time become insolvent and that can establish that he/ she took his/her conduct as a director of every reasonable step prior to the that company makes him/ her liquidation to minimise the potential unfit to be concerned in the loss to the company’s creditors. management of a company; CONTINUED
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LIABILITIES | CONTINUED
Transactions at undervalue another, particularly where the (s238 IA 86) party is motivated by a desire to improve that creditor’s position. Where a director executes a transaction at an undervalue such Transactions defrauding that it is not in the best interests creditors (s423 IA 86) of the company for example where the sale of an asset of the Where the purpose of a transaction company is at less than its value or was to put an asset out of reach of where payment is accepted of less creditors. They are not subject to than the recoverable value. This the 2 and 5 year limits that apply applies to transactions that take to transactions at an undervalue place during the period six months under s238 IA 86 above. prior to the onset of insolvency or two years for transactions with Fraudulent trading a connected party. A connected party is as defined as: This is similar to the definition of wrongful trading defined by s213 àà A director or shadow IA 86 and s993 CA 06 respectively director of the company; but makes it a criminal offence where a director knowingly àà An associate of such a director carried on the company’s business or shadow director i.e. a with the intent to defraud the spouse or relative of a director; creditors or any other person. àà An associate of the company Fraudulent trading liability can i.e. another company arise regardless of whether or with common director(s) not the company is insolvent. or shareholder(s). Misfeasance/ breach of duty Preferential transactions (s239 IA 86) Where a director breaches their fiduciary duty, by e.g. misapplying, Where a transaction by the retaining or becoming accountable company was motivated by the for any money or property of desire to put a third party in a the company. better position than they would otherwise have been on liquidation (had the transaction not taken place) e.g. writing off a debtor’s liability to the company or paying one creditor in preference to
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LIABILITIES | CONTINUED
Health and Safety at Work Act Individual directors are also 1974 and subsequent Regulations potentially liable for other related offences, such as the common Health and safety law places law offence of gross negligence various duties upon organisations manslaughter. Under the common and employers. Directors can law, gross negligence manslaughter become personally liable when is proved when individual officers these duties are breached: it is of a company (directors or business important to note that members of owners) by their own grossly the board can have both collective negligent behaviour cause death. and individual responsibility for This offence is punishable by a health and safety. Larger public and maximum of life imprisonment. private sector organisations need to have formal procedures for auditing Corporate Manslaughter and and reporting on their health and Corporate Homicide Act 2007 safety guidelines and performance. Under this Act, an offence will If a health and safety offence be committed where failings is committed with the consent by an organisation’s senior or connivance of, or is attributable management are a substantial to any neglect on the part of, element in any gross breach any director, manager, secretary of the duty of care owed to the or other similar officer of the organisation’s employees or organisation, then that person members of the public, which (as well as the organisation) results in death. The maximum can be prosecuted under penalty is an unlimited fine and section 37 of the Health and the court can additionally make Safety at Work etc Act 1974. a publicity order requiring the organisation to publish details Those found guilty are liable to of its conviction and fine. be fined and, in serious cases, imprisoned. In addition, the Company Directors Disqualification Act 1986, section 2(1), empowers the court to disqualify an individual convicted of an offence in connection with the management of a company which includes health and safety offences. This power is exercised at the discretion of the court and requires no additional investigation or evidence.
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INSOLVENCY Specifically, directors should ensure that they obtain regular updates as to of the company’s general financial position to ensure that they 07. are kept fully aware at all times of the solvency or potential insolvency of the company.
When the company is made Notes on insolvency or becomes insolvent the directors must recognise their It is important to be aware that it is duty to the company’s creditors, quite possible for your company including current, future and to have a strong balance sheet contingent creditors. but still be unable to fund its cash flow – some refer to this as There are four primary being “technically insolvent”. tests for insolvency: An unsatisfied judgement or àà Cash flow test– can the unresolved statutory demand are company pay its debts as and grounds for a creditor to petition when they fall due? i.e. the to wind-up your company through company’s cash resources are the courts - again some refer to this running out. Therefore, the as being “technically insolvent”. company is not going to be able to pay its creditors on time; There is no definition of “technical àà Balance sheet test – negative insolvency”: either your company net asset value, where is solvent or insolvent. the company’s assets are less than its liabilities; If you as a director have any doubts about the solvency of a company of àà Unsatisfied judgement – where which you are a director, you should judgment obtained against the immediately seek professional company has not been paid; advice whether on behalf of the àà Statutory demand – where company and/ or yourself personally. a statutory demand made Such advice if taken, should be on the company is either expected to remove you from not paid or not disputed. further personal liability, providing you follow the written advice given by that professional. Indeed make sure you get the advice in writing so you can refer to it in the event of a subsequent investigation. CONTINUED
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INSOLVENCY | CONTINUED
are professionally qualified to However strong give advice on insolvency. If you wish to save your company your balance then you might seek advice from a turnaround or restructuring sheet, if you professional who would normally involve appropriate professional cannot pay advisers to protect themselves as well as you since in becoming your debts advisers they become de facto or shadow directors and therefore on time then liable for any advice they give.
your company Directors need to consider their objectives and take appropriate is insolvent steps, where necessary with appropriate advice. Directors’ action on insolvency There are circumstances where it In the event that your company is acceptable to continue to trade is insolvent under one of the while the company is insolvent but above tests, you and indeed in view of the potential for directors all the directors should take to be held to be personally liable, professional advice. You should they are advised to only trade note that only solicitors or on only after having received licensed insolvency practitioners appropriate professional advice.
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TRADING WHILE INSOLVENT Continuing to trade is a decision that should be taken formally by the whole board of directors with a note made of any dissent.
08. The decision to continue to Objectives trade and the reasons why the directors believe this is in the In a potential or actual insolvency best interests of creditors (not the situation, directors should company) should be recorded have the following common in the minutes. It would normally objectives foremost: be taken following appropriate advice and with advisers present. àà Maximise the interests of creditors; In view of the additional burden àà Comply with the law; of responsibility placed on the directors of an insolvent company, àà Avoid personal liability; it is advisable to employ the àà Maximise the interests services of specialist turnaround or of employees. restructuring professionals to assist them while the company is returned Directors are also likely to have to a solvent trading situation. Such other objectives which may professionals, whether or not they potentially conflict with their are formally appointed as directors, primary objectives such as: executives or advisers are aware that they are likely to be deemed àà Keeping the business alive; de facto directors or shadow àà Terminating onerous and accordingly are expected to liabilities and contracts; act with the same duty of care to creditors as the directors. àà Minimising personal guarantees – this can be an issue as there Directors, executives and advisers is scope for conflict of interest involved with continuing to trade by breaching duties defined an insolvent company will then by insolvency legislation, need to consider their objectives specifically the duty relating in order to take appropriate steps. to Preferential transactions; àà Other objectives may apply depending on the type of business and financial circumstances.
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TRADING WHILE INSOLVENT | CONTINUED
Continuance principles àà Credit cards issued to directors and senior personnel The following list is a useful should no longer be used; guide for directors and àà All assets of the company professional advisers when should be properly insured; trading while insolvent: àà A director or adviser should àà Don’t continue to trade when be appointed to deal with all the company is insolvent, press and media enquiries. unless you are certain that It may be appropriate for there is a strong prospect the board to approve press that the company will avoid statements before release; insolvent liquidation; àà No creditor claiming retention àà Don’t incur further credit of title to goods previously or issue company cheques supplied by him/ her should when you know there is little be permitted to remove any or no prospect of payment; goods without professional advice. As a compromise, the àà No further payments should goods concerned may be be made to any outstanding removed from sale or the sale creditors, where paying proceeds can be paid into a them could be regarded as trust account, escrow account preferring them to others; or solicitor’s client account àà No further credit should pending resolution of the claim; be taken and any goods or àà Sub-contract creditors should services required should be not be supplied goods to avoid paid for on a pro-forma basis them applying set-off as or immediately upon supply a creditor; (i.e. you must not put any creditor in a worse position); àà No goods of the company should be supplied to sub- àà No disposal of the company’s contractors who are owed money or the company’s money by the company to goods should be made to any avoid them applying set-off creditor or customer who is as a creditor; owed money by the company, where the disposal could àà No goods of the company be claimed against set off; should be dispatched on carriers who are owed money àà Any disposal of the company’s by the company to avoid them assets must comply with imposing a carrier’s lien; relevant sections of the Insolvency Act 1986; CONTINUED
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TRADING WHILE INSOLVENT | CONTINUED
àà No goods of the company àà Payments/ transactions should be stored in warehouse with directors or connected facilities that are owed money persons must be made on a by the company to avoid them bona fide, arms length basis imposing a warehouseman’s lien; to avoid them being regarded as attempts to put assets àà Dealings with any creditor beyond the reach of creditors; should only be continued with caution. As advised àà Debtors’ payment terms should above, attempts should be be reviewed with the view to made to avoid a situation negotiating early payment, where a set-off, lien or possibly offering a discount ransom can be raised; to justify the revised terms; àà Don’t take customer deposits àà HMRC time to pay when you know the company arrangements can help spread is unlikely to fulfil the order. payments to assist cash Any deposits or pre-payments flow when settling a large received from clients should tax liability; however these be paid into a separate arrangements should be trust account until the agreed with HMRC in advance service has been rendered of them becoming due and and invoice submitted; such an arrangement cannot be assumed. It should be àà Do continue to keep proper noted that any late payment accounting records; of an agreed payment will àà Do continue to submit be deemed a failure of the returns and pay all future arrangement and most likely HMRC liabilities on time; result in the full amount becoming immediately due. àà Do continue to pay all future pension contributions on time; The above list is not exhaustive but it should highlight the need for tight àà Do continue to submit returns financial controls and additional and accounts to Companies administration procedures to House on time and pay be introduced when a company any future fees required; continues to trade whilst insolvent.
Key advice Know your company’s financial situation and its goals and monitor them regularly. If it becomes insolvent than take and follow advice from an appropriate adviser.
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THINGS THAT DIRECTORS SHOULD ALSO BE AWARE OF This section covers other things that directors should be aware of. It is essentially a list of things that are reviewed by liquidators when dealing with an insolvent company.
09. • accounting records must, Record keeping in particular, contain Directors have a statutory entries from day to day duty to maintain adequate of all sums of money accounting records. received and expended by the company and The accounts are always reviewed the matters in respect when a company enters a formal of which the receipt insolvency procedure where and expenditure takes evidence that they have not been place, and a record of adequately maintained can result the assets and liabilities in the directors being disqualified of the company; • if the company’s business àà Be aware of the need involves dealing in goods, to maintain accounting the accounting records records (sections 386 to 389 must contain statements of Companies Act 2006): stock held by the company • adequate accounting at the end of each financial records being those that year of the company, all show and explain the statements of stocktakings company’s transactions, from which any statement to disclose with reasonable of stock as is mentioned accuracy, at any time, the in paragraph (a) has been financial position of the or is to be prepared, company at that time; and except in the case of goods sold by way • adequate accounting of ordinary retail trade, records means knowing statements of all goods with reasonable accuracy sold and purchased, the financial position of the showing the goods and company at intervals of the buyers and sellers in not more than six months; sufficient detail to enable all these to be identified;
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THINGS THAT DIRECTORS SHOULD ALSO BE AWARE OF | CONT.
àà Be aware of how long records àà Failure to maintain accounting must be kept: records is a criminal offence; • adequate accounting àà Directors are jointly liable, records being those that including non-executive directors. show and explain the Connected party transactions company’s transactions, involving directors and other to disclose with reasonable connected parties accuracy, at any time, the financial position of the àà Be aware of the need for company at that time; members resolutions to approve certain transactions • accounting records must, involving directors or connected in particular, contain entries persons (sections 190 and 197 from day to day of all sums Companies Act 2006): of money received and expended by the company • substantial transactions and the matters in respect with directors involving of which the receipt and property and non-cash expenditure takes place, and assets (those involving a record of the assets and £5,000 or more that exceed liabilities of the company; 10% of the company’s asset value, or those that exceed • accounting records must £100,000); be kept for at least six years from the end of the financial • providing loans to directors; year to which they relate • providing guarantees for • accounting records must be the benefit of directors; kept for longer if they relate • the burden of proof is to transactions that last reversed for connected more than six years, or they party transactions with the relate to something that is director presumed to be expected to last for longer liable unless the director than six years (equipment justifies the transaction. or machinery), or if you filed a late tax return. • if the accounting records are lost, stolen or destroyed you should do your best to recreate them, you must also tell HMRC immediately and mention this in your Company Tax Return. CONTINUED
22 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency
THINGS THAT DIRECTORS SHOULD ALSO BE AWARE OF | CONT.
Director loan accounts (DLA) in recent years including for breaches of new anti- àà Loans to directors will almost corruption, data protection always be pursued in the event and environmental legislation of insolvency even where that can impose imposing directors claim that payments potential fines on directors were made in lieu of salary; as well as on the company; àà Directors can be held to be àà The circumstances where jointly and severally liability HMRC can seek to recover for DLAs even when they outstanding company PAYE are not the beneficiary. and NICs from the directors: Breach of duty as trustee • PAYE – directors can be àà Be aware of duties when personally liable for PAYE acting as a trustee of third debts associated with party assets such as pensions payments to themselves or client deposits (section (or associated persons 21 Limitation Act 1980). such as family members); Misrepresentation and • HMRC has the power tort of deceit to transfer unpaid PAYE debts of the company àà Be aware of duty to not to a particular director make dishonest, false or (or employee) and seek reckless representations recovery from them that lead to others relying personally for any payments on such representations they received knowing that (Misrepresentation Act 1967 or the employer had “wilfully the common law tort of deceit); failed” to deduct tax; àà Examples include a director • NIC – directors can be signing a cheque that bounces, personally liable for NIC, making a false insurance not just on their own claim, fresh air invoicing to remuneration but for all draw down funds from a sales outstanding NIC debts; ledger funder and many more. • HMRC also has the power Personal liability to seek recovery of unpaid àà The circumstances where NICs (both primary and directors can incur personal secondary) from directors. liability have increased
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23 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency
THINGS THAT DIRECTORS SHOULD ALSO BE AWARE OF | CONT.
HMRC security deposits HMRC security deposits and guarantees and guarantees àà HMRC can (and more àà HMRC can (and more often than not will) require often than not will) require security or a guarantee security or a guarantee from directors who were from directors who were involved in a prior company involved in a prior company that has become insolvent; that has become insolvent. àà The security amount can be for either or both of future VAT and PAYE and is likely to be assessed as follows: • VAT deposits are normally for their estimate of 6 months of average VAT payable by prior company; • PAYE deposits are normally for their estimate of 12 months of average PAYE payable by prior company; àà The security is normally returned after two years of compliance by the successor company.
24 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 DISCLAIMER This Guide is intended to provide a general overview of directors’ duties and responsibilities and covers certain legislation but it is not designed or purports to cover all aspects of relevant law nor all the directors’ duties and responsibilities. Accordingly it should be used as an introduction to the topic. While every effort has been made to ensure that the information contained in this Guide is accurate and up-to-date as of the time of writing, you should not seek to apply or rely on any of the information contained within without first taking appropriate professional advice. Accordingly neither Tony Groom of K2 Partners Ltd trading as the Online Turnaround Guru, nor K2 Partners Ltd that trades as K2 Business Partners and K2 Business Rescue accept any responsibility for negligence which arises from any action taken as a result of seeking to rely on the information contained in this document.
I hope you have found this guide useful and that it has added to your knowledge of your duties and responsibilities as a director. It has covered the key topics and provides guidelines you should follow and I hope helped you appreciate the distinction between your priority of duties: to shareholders when the company is solvent and to creditors when it is insolvent. If you feel able to comment on the guide please do so via the feedback section of my website at www.onlineturnaroundguru.com.
If you are concerned about the financial situation facing your company or think it might be insolvent I strongly recommend you seek advice from a solicitor, an insolvency practitioner or a certified turnaround practitioner. You can also contact me via my website at www.onlineturnaroundguru.com.
If there are other subjects you are interested in please subscribe to my other guides and let me know if I should add new ones. I am also available to answer questions about your business, speak with you personally, or meet you so please feel you can contact me via my website at www.onlineturnaroundguru.com