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.

With the current financial difficulties faced by the oil & gas industry, this issue is especially pertinent to that sector.

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
  • 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.