Directors of group companies facing financial problems

Within a group, certain group members may employ the group's employees, or own its premises, or provide services, and make these available to other members of the group. It is common for payments between group members to be left as intercompany debts and credits, rather than settled in cash. Arrangements such as these may give rise to difficulties for directors when companies within the group become insolvent. In this situation, the directors of each company must act in relation to each company without regard to their duties as directors of other group companies. This may give rise to problems where there is a conflict between duties owed to different group companies, and in these circumstances it may become necessary for directors to resign from some or all of their other directorships.

It may be that the solvency of one group company is dependent on the solvency of another. This may be because the assets of one substantially comprise shares in or debts owed by the other, or the liabilities or debts of one are guaranteed by the other, often as part of group borrowing arrangements. Although the overall objectives of all companies within the group may be the same, in these circumstances the directors of each company must principally have  regard to the effect which actions taken, or permitted, by that individual company may have on the creditors of that company, rather than the creditors of other companies within the group or the overall solvency of the group as a whole.

Ignore corporate manslaughter at your peril

Earlier in July of this year, Lion Steel Limited decided to plead guilty to the offence of corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007 on the basis that (with the agreement of the prosecution and the court) the charges of gross negligence manslaughter against three of its directors would be dropped.

The Company was fined £480,000 making it the largest fine to date, albeit still below the £500,000 starting point stipulated in the relevant sentencing guidance. The period for payment of the fine and costs was extended to up to three years, reflecting submissions made regarding the company's ability to pay such a significant sum immediately without prejudicing the prospects of current employees.

Beware the Bribery Act 2010

Since 2011, Britain has one of the harshest anti-corruption regimes in the world and one particular area of on-going concern is hospitality and entertainment.

The more "lavish" the hospitality or expenditure, the greater the likelihood that it could amount to a bribery offence but the current lack of interpretation in the courts surrounding what would constitute "lavish" expenditure is continuing to cause uncertainty amongst many businesses, particularly over the summer with events such as Ascot, Wimbledon and Lords, and more recently the Olympics. Although the Department for Justice states that bona fide "hospitality and promotional expenditure… established and important part of doing business", without clear guidelines, or some decided case law, as to what is acceptable, companies need to tread carefully as their actions will only be judged after the event.

Even those travelling to the UK from overseas, who are intending to entertain clients, suppliers and customers,  need to be aware of these restrictions.

Directors' personal liability and insurance cover

Directors must be prepared for the unwelcome possibility of claims for personal liability being brought against them in these recessionary times.  There are a number of ways in which potential liability could arise, including:

  • breach of statutory duties under the Companies Act 2006;
  • liability for wrongful or fraudulent trading under the Insolvency Act 1986;
  • claims against individual directors under the Equality Act 2010;
  • breach of health and safety and environmental legislation; and
  • prosecutions under the Corporate Manslaughter and Corporate Homicide Act 2007 and the Bribery Act 2010.

However directors are permitted to put in place directors' and officers' insurance (commonly referred to as "D&O" cover) for liabilities incurred by them in their roles as directors of the company. This includes cover for liability in respect of negligence, default, breach of duty or breach of trust by the director in relation to the company. It is important that the terms of the D&O policy are carefully considered and any exclusions, notification requirements and time limits are properly understood before the policy is purchased, particularly as some insurers may seek to avoid or mitigate their exposure to a claim.

Directors need to be human!

Companies which had only corporate directors were given a grace period under the Companies Act 2006 to appoint a natural person - a real human being - as a director.  This grace period expired on 1 October 2010.  If you haven't already done so, companies that currently only have corporate directors should appoint at least one natural director over 16 years of age.  This is to ensure that there is always at least one person in every company who can be held accountable for its actions.

Failure to appoint a natural director could lead to penalties and fines being payable by the company, (plus additional daily default fines) and problems filing the company's accounts (if there is only one corporate director).

Protect your home address

It is now possible for directors to provide a service address as opposed to having their home address as a matter of freely searchable public record.  Simply file form 288C.

Reminder: what directors should be doing

  • Understand what your duties are; pleading ignorance (or simply resigning) will not work!
  • Comply with your statutory requirements including filing annual accounts and annual returns on time.
  • Satisfy yourself as to the company's Bribery Policy and Health and Safety procedures.
  • Regularly review the company's financial position, and understand its possible dependency on other group companies.
  • Consider D&O insurance or review the terms of your existing insurance.
  • Record your decisions, and why actions have been taken.
  • If the company or group is facing financial difficulties, be careful with creditors (particularly preferring one creditor over another), review your position as a director of other group companies, and think hard before incurring more credit.
  • Take professional advice when necessary and particularly when you have concerns about your continued ability to trade.