Directors’ duties and the twilight zone of potential insolvency
In this Newsletter, following recent cases, we examine the state of the law about the circumstances in which directors – as their companies get into financial trouble – must act in the interests of creditors, rather than shareholders, and the way in which courts will judge whether they have failed to act lawfully.
Directors will very likely know that by statute (s.172(1) of the Companies Act 2006) they are under a duty, which they owe to the company, to “act in the way which they consider in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”, which is to say, for the benefit of its shareholders.
They should also know that “in certain circumstances” this duty is modified or displaced, and they must instead “consider or act in the interests of creditors of the company”: s.172(3). A breach of that duty can lead to subsequent claims for financial compensation – usually by the company acting by its liquidator; it is therefore a duty which needs to taken seriously.