Avoiding being haunted by past decisions as a director

Posted: 31/10/2023

As a director of a company, the regulatory landscape in England and Wales can feel like a scary place. The possible ways a director can become exposed can feel endless – especially if one asks Google.

Just ask any corporate lawyer fortunate enough to own the tome that is the Companies Act 2006. In the absence of becoming a legal expert, what can directors practically do to best protect themselves when carrying out their role?

Whilst the Companies Act 2006 is vast, the core duties contained in s.171 – 177 are not. As this previous article alludes to, there may be additional obligations on a director in larger organisations.

The overriding points to remember/nightmare avoidance measures are:

• Understand your duties as a director under the Companies Act 2006, and any other relevant legislation. If easier, ask a lawyer to summarise for you.
• It falls under the point above (under the duty to avoid conflicts of interest), but understand which hat you are wearing when making decisions, as many directors are also shareholders. This becomes even more important where a business is in a distressed position. Multiple hat wearing is not merely a fashion disaster.
• Know your fellow directors and what they are doing (ignorance is most certainly not bliss!).
• Document decision making contemporaneously. Seeking to rationalise decisions retrospectively is unlikely to assist a director’s cause.
• If in doubt, seek professional advice (early).
• Act honestly and reasonably at all times.

Directors are not expected to have a crystal ball or hold a seance, but they are expected to think about the consequences of their decisions and act in a way which would be most likely to promote the success of the company for the benefit of its members as a whole or, under certain insolvency related circumstances, to act in a way which protects the interests of the company’s creditors as a whole. What that means in real life though, can be hard to know without guidance.

If you find yourself facing a threat of litigation based on alleged acts or omissions which occurred whilst you were a director of a business, which is now in an insolvency process, obtaining professional advice at the earliest opportunity in order to avoid potentially prejudicing your position is paramount. 

Most contentious insolvency matters are capable of a sensible commercial resolution, and ensuring that you have the right support and pragmatic and commercial advice will often lead to a significantly better outcome than the alternative, which might be years of contested court proceedings which culminate in a very high-risk conclusion. Where matters cannot be resolved outside of court, setting your stall out early, and understanding the strengths and vulnerabilities in all cases is a significant advantage.

This article is intended to provide a summary of the law in this area and does not constitute legal advice. Should you wish to obtain advice based on specific facts and circumstances, please contact us.

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