A recent Supreme Court verdict addressed an important question regarding directors’ duties: In what circumstances must directors act in, or at least consider, the interests of the company’s creditors?
The case turned on a dividend payment made before the company involved went into insolvent administration. Some ten years before, in fact. However, the take-away message for directors is more important than the detail of the case.
Directors normally have a fiduciary duty to act in good faith in the interests of the company, for the benefit of its members as a whole. But if a company is insolvent or nearing insolvency, this is modified: ‘As the financial position of the company deteriorates, the shareholders’ interests decrease in importance, and those of creditors increase.’
Once insolvency is inevitable, the interests of creditors become paramount.
This landmark case has a clear message. It warns that directors must ‘stay informed’. Noting that ‘progress towards insolvency may not be linear’, it suggests the need for:
- directors to ensure they are told if cash reserves or the asset base of the company have been eroded such that creditors may or will not get paid when due
- director access to reliable information about company finances
- the maintenance of up-to-date accounting information (note that companies can instruct others to do this on their behalf)
- appropriate training for directors about their responsibilities and penalties for failure to comply.
The underscoring of director responsibilities is particularly important during a time of recession, when many companies are feeling financial strain. Your RfM advisor is here to help with advice during challenging trading conditions. Enquire online or contact one of our offices.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.