Is ignorance bliss? Why it is important for directors to document their actions if concerned they are insolvent.
Directors must comply with their duties as stated in the Companies Act 2006. Failure to do so can have serious consequences.
Directors in the UK have many duties which are enshrined in the Companies Act 2006. This act imposes specific restrictions and controls on company directors to prevent them from abusing their powers. Ignorance is not bliss (and certainly not an excuse), and failure to comply could lead to financial remedies being sought against them, and/or disqualification. These duties apply to all directors of all companies, public and private, holding or subsidiaries, as this infographic shows. In this article we look at one of the key responsibilities of directors – that of keeping accurate and up to date records and why this is so important, in particular when a company is in financial difficulties and facing the prospect of insolvency.
“I am having an increasing number of meetings with companies in financial difficulty where the directors are unaware of the importance of documenting their actions. This could be as simple as sending emails to themselves and/or fellow directors stating why they are making the decisions and taking the actions they are. Such actions could make life a lot easier for directors if insolvency strikes.”
The 4 main Directors’ Duties
The 4 main areas of Directors’ Duties are:
- Financial Duties,
- Trading Duties,
- Fiduciary Duties and
- Administrative Duties.
All are important and all must be followed to the letter of the law. Maintaining up to date and accurate records falls into the Administrative Duties’ category. This category also includes the need to keep evidence of any transactions to ensure they are at full value and arms-length and also keeping minutes of major decisions that are taken.
Why is keeping records so important?
- Firstly, they can provide evidence of the company’s financial position, which is essential when creditors and other stakeholders are assessing a company’s solvency and viability. Having accurate and up-to-date records also ensures that directors can make informed decisions about how to manage a company’s finances in order to respond effectively to the threat of insolvency.
- Secondly, good record keeping helps ensure compliance with statutory requirements such as filing annual accounts with Companies House, which is a legal requirement for all limited companies. Failure to do so can result in fines or even director disqualification.
- Thirdly, good record keeping can be used to protect directors from the risk of personal liability if they are accused of misfeasance (wrongful or negligent conduct) in relation to their management of the company’s finances.
- Fourthly, having comprehensive and accurate records can help demonstrate that the directors acted responsibly in their management of the company’s finances.
- Fifthly, good record keeping can also help minimise the impact of insolvency if it does occur. Having accurate and up-to-date records can help make the insolvency process less complicated and costly, as well as helping to ensure that all creditors are treated fairly.
The role of Insolvency Practitioners
Often when a company becomes insolvent, if the Insolvency Practitioner has reason to believe that the insolvency was caused by a director(s) not carrying out their responsibilities correctly, then they will investigate, as they are required to do so. The outcome of such an investigation can lead to director disqualification, an insolvency claim or even a custodial sentence.
When an Insolvency Practitioner is appointed, they are legally bound to investigate the behaviour of the directors and report any findings that show their duties have not been carried out correctly to the Insolvency Service. One of the first things an Insolvency Practitioner will want to see is evidence of up to date and accurate books and records. It is an immediate red flag if these don’t exist, and the prospect of an insolvency claim, director disqualification or worse increases.
In conclusion, it is essential for directors to ensure that they keep accurate and up-to-date records and documentation in order to comply with their duties as a director and help to protect themselves from personal liability. Doing so can also help minimise the impact of insolvency if it does occur.
How can Insolvency Practitioners help?
Directors need to make the right decisions, quickly, when their companies are in financial difficulties and facing insolvency, especially in relation to their duties as directors. These decisions need to be properly recorded. Here at Antony Batty & Company, our team of Licensed Insolvency Practitioners and Business Recovery and Restructuring Specialists can help Directors to ensure they fulfil their duties with practical measures and advice that can create a framework for managing a company in difficulty.
This advice can help to ensure that the Directors can avoid criticism at a later stage, if insolvency is the outcome, reducing the risk of a director disqualification investigation. Such advice can also be crucial in directors keeping control of the decision-making process, helping to prevent HMRC, banks, landlords or creditors influencing the outcome.
Inevitably, if a company is already insolvent and liquidation is the only option, then it is already too late to do anything if decisions have not been properly recorded. Therefore, directors must take advice quickly before insolvency strikes. It is well known that the courts place great reliance on Directors, when hearing the results of an investigation, who have consulted with their accountants or solicitors first. This is even more the case when the directors under investigation have obtained professional, independent advice from a licensed Insolvency Practitioner.
Contact us or call us on any of the numbers below for help and advice on insolvency and the possible issues regarding the duties and responsibilities of directors, including director disqualification. The initial discussion is FREE and without obligation.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley: