The High Court has said, in a case which concerned an application to restrict two directors of an insolvent company*, that company directors should review their company's management accounts on a monthly basis to enable them to assess whether their company is trading profitably. The court said that monthly management accounts, and a clear assessment of where the company is going, are as essential to company directors as navigation instruments are to a pilot.
There was no documentary evidence available to the High Court in this case to indicate that the directors were engaging, as they claimed, in a continuing assessment of their company's profitability, or that they were meeting their accountants to pay their tax liabilities as they fell due. This resulted in them "flying blind", by asserting that their duties had simply been delegated to "someone else" and was described by the judge as "irresponsible".
However, crucially, the High Court emphasised that this is not to impose a "counsel of perfection" on directors. It is mere prudence, the High Court judge said, to ensure that an enterprise is not engaging in over-trading, and that increased turnover is not misconceived as increased profitability. The judge said that directors often confuse one with the other.
The judge went on to impose restriction orders on the two company directors. He indicated that any future application for relief from the restriction orders which might be taken by the directors would turn on whether they had taken steps to educate themselves as to the financial realities of running a company and their duties as directors.
This message in this case is very clear – company directors must be proactive in terms of their company's financial status. The delegation of financial management will not, of itself, be sufficient. Directors are expected to review the company's accounts themselves on a regular basis.
*MDN Rochford: Kenneth Fennel v Michael Rochford and David Rochford unreported High Court, 18 August 2009