Directors’ duties of care have not gone away

The COVID-19 pandemic has introduced for many people – for individuals and businesses alike – an uncertainty the like of which we have not seen before. However, some things remain and Alok Sharma, the Business Secretary, has been at pains to note recently that – despite some of the recent  (and temporary) relaxation of the wrongful trading rules in relation to their application to company directors –  the other checks and balances that help to ensure directors fulfil their duties properly do, and will, remain in force.

A recent case – while not directly related to COVID-19 – brings into sharp focus the extent of directors’ duties to the company of which they are directors.

The case centres around a recycling company, Green Box Recycling Limited, of which Messrs Ford and Monks were directors and shareholders. In that company, there was one other shareholder who owned the vast majority of the shares (Mr Davies). Messrs Ford and Monks believed that they had been deserted by Mr Davies who had moved abroad and who they felt had abandoned Green Box Recycling Limited at a time in which it was struggling financially. They therefore created a new company, Green Box Recycling (Kent) Limited, in which they were also both directors and shareholders, in order to ensure that they could divert business from Green Box Recycling to the new company and thereby continue to trade. Their argument was that the business that was available would simply have been lost had they not exploited the opportunity themselves because Green Box Recycling Limited was so close to insolvency and could not take the opportunities presented. The judge however disagreed entirely and held both directors liable of breach of their directors’ duties to Green Box Recycling Limited.  By incorporating the new company and diverting business that had been with Green Box Recycling Limited to it, both gentlemen had breached the duty imposed on them by Section 175 of the Companies Act 2006 to avoid conflicts of interest. They were additionally held to have breached their duty to promote the success of Green Box Recycling Limited.

Where a company is insolvent or likely to become insolvent, it can also not be forgotten that the directors owe their primary duty of care to creditors and not to the shareholders of the company.

The principal point to note out of this case and the current situation is that directors’ duties of care have not gone away.

Contact us

If we can guide you or assist you in any way in relation to your duties as a director, please do not hesitate to get in touch with Kathryn Paisley t. 01825 744447 e. kathrynpaisley@rixandkay.co.uk or any member of the corporate and commercial team.  If you have an insolvency-related enquiry, partner Richard Ludlow t. f 01732 441695 e. richardludlow@rixandkay.co.uk from the insolvency team would be pleased to assist.