With the current financial difficulties faced by the oil & gas industry, directors of companies incorporated in England and Wales must be mindful of their duties and responsibilities to the company as well as the potential personal liability that could arise from breaching those duties and responsibilities in the context of an insolvency.
Who qualifies as a director?
Under English law, directors are generally appointed in accordance with the company's articles of association. In some circumstances however: (i) a person who acts as a director without having been appointed validly, or at all, is subject to many of the same duties and liabilities as a duly appointed director (de facto directors); and (ii) a person who does not act as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act (shadow directors) can also be fixed with liability. In addition, persons duly appointed by or on behalf of a director to act in his or her place or to stand-in for him or her (alternate directors) are usually deemed to be a director for all purposes and so subject to the same duties and liabilities as any other director.
Directors' Duties and Responsibilities – Companies in Financial Difficulty
Where a company is insolvent, or in danger of becoming so, directors face additional duties and responsibilities, including the requirement to have regard to the interest of the company's creditors. In these circumstances, directors may need to take difficult decisions and could face personal liability if they take the wrong decisions, it is therefore important to seek professional advice at an early stage.
Directors may wish to consider the following non-exhaustive list of additional duties and responsibilities:
Directors of a company in financial difficulty should regularly review with its professional advisers whether it is advisable for the company to continue trading. Many of the agreements commonly used in the oil & gas industry require a company to meet ongoing payment obligations, for example:
- ongoing consideration payments under a farm-in agreement, where the farmee is required to fund a work program over a period of time in order to acquire a participating interest in a production sharing contract (PSC) and related joint operating agreement (JOA);
- cash calls under a JOA, which are required to meet minimum work obligations under a PSC; and
- costs and expenditures required to be incurred under service contracts, for example where such services are required in order to fulfil minimum work obligations, and the corresponding costs and expenditures are recoverable from future production.
Such ongoing payment obligations should be carefully considered by the directors of a company in financial difficulties in order to balance the need for the company to meet such obligations to retain its interest in the relevant asset with its ability to fund those payments. If a company continues to meet its obligations under such agreements and that company subsequently goes into insolvent liquidation, should a court find that a director knew, or ought to have concluded, at some time before the commencement of the winding-up that there was no reasonable prospect that the company would avoid going into insolvent liquidation, then that director may be ordered to make a contribution to the assets of the company. A director can mitigate this risk by showing that he or she took appropriate steps to minimise the potential loss to the company's creditors.
If a company is in financial difficulty and there is any risk of an impending insolvency, board meetings should be held on a regular basis so that the directors can continue to carefully monitor the ongoing situation. A clear and accurate record should be kept of the matters considered, actions taken by directors and external advice received. Any director whose views are not reflected in action taken by the board of directors may wish to ensure that his or her views are clearly and accurately recorded in the board minutes.
Once a company goes into insolvent liquidation (that is, where its assets are insufficient to meet its debts and other liabilities, plus the expense of winding up), directors must continue to carefully consider any payments to be made by the company. Directors may be liable if they were knowingly party to carrying on the business of the company with intent to defraud creditors, or for any fraudulent purpose. If directors continue to trade and incur debts at a time when they know there is no reasonable prospect of those debts being paid, either at the time they are due or shortly afterwards, then the requisite intention to defraud may be found. Fraudulent trading is a criminal offence under the Companies Act 2006 and may lead to unlimited civil liability under the Insolvency Act 1986.
If, during a company's winding-up, it appears that a director or other person involved in the management of a company has misapplied company assets, or been guilty of any misfeasance or breach of duty in relation to the company, the court may order them to restore or account for the assets to the company, or to make a compensatory contribution to the assets of the company. Actions for misfeasance are more common than actions for wrongful or fraudulent trading.
Re-use of company names
Particular care should be taken where there are directors in common of group companies with similar names and a member of the group goes into insolvent liquidation. As it is usual in many jurisdictions for local subsidiaries to be required to hold oil & gas assets, oil & gas companies are commonly part of complex group structures with multiple subsidiaries sharing a common company name. In certain circumstances, if a company has gone into insolvent liquidation, a person who was a director or shadow director of that company at any time in the preceding 12 months may incur liability if, without the permission of the court, they act as a director or take part in the management of another company with the same or a similar name as the first company. Contravention of the prohibition is a criminal offence and the director may be rendered personally responsible for the debts and other liabilities of the second company.
A director who contravenes the law risks being disqualified from acting as a director or otherwise being concerned in the management of a company for up to 15 years, in addition to any other liabilities he or she may incur. In addition to breach of the duties and responsibilities noted above, a court must disqualify a director from involvement in the management of any company if he or she is or has been a director of a company which has become insolvent and his or her conduct as a director renders him or her unfit to be concerned with the management of a company.