Directors’ duties: ignorance is no excuse!

Did you know that all directors are subject to duties?

Directors of companies are subject to clear duties to their companies, under statutory company law but also under “common law” – i.e. the law as it has developed over centuries.

A recent case has emphasised very clearly that those duties apply irrespective of whether or not the director in question is active in running the company. Moreover, being inactive as a director is – far from being an excuse that will relieve a person from liability – a failing that is likely to give rise to a personal liability that might otherwise have been avoided.

What happened?

The case (Stacks Living Ltd and others v Shergill and another) concerned two companies that were both put into insolvent liquidation.

The court was asked to consider the role of two individuals who were both directors, one of whom was the principal director and primarily active in running both companies, and the other of whom was only a director of one of the companies for a short period of time, during which they undertook little to no activity and indeed failed to understand or to seek to understand the company’s business.

The case centred on whether the directors bore any personal liability for the liabilities of the companies in the insolvency process. Ordinarily, directors will not bear any personal liability, but in certain circumstances (usually relating to insolvency if the directors have not conducted themselves appropriately) it is possible that directors bear a certain amount of personal liability for the companies’ losses and liabilities to creditors.

Key findings from the case:

Leaving aside the insolvency elements of the matter, the key point for directors to bear in mind is that the second director (remember, who was only a director for a matter of months) tried and did not succeed in relying on one of the provisions of the Companies Act 2006 which – if they have acted honestly and with integrity – can relieve directors of a liability they might otherwise have faced.

The court found that this particular director, despite having been wholly uninvolved with the business of the company in question, had an overriding (“irreducible”) duty to be involved and to interest themselves in the business of the company – a failure to do so was by definition unreasonable.   As a result, the director who had minimal involvement with the company and played no part in running the business got a nasty shock when they were held liable to pay certain liabilities of the company.

Takeaways for directors:

The key takeaway for all company directors is to inform themselves and keep themselves informed of how the business is being run: directors are subject to duties whether they are active in running the business or not. Doing nothing (even if a person has become a director unwillingly or does not understand their duties) might well not protect a director from personal liability if they are found to have breached their duties.

It is important to note that although directors may delegate their duties, they still remain responsible for the supervision of the activities of those to whom they delegate functions: if they do absolutely nothing and claim that they were not responsible for running the business then that itself constitutes a breach of their duties and could be enough to prevent them from being able to claim relief from personal liability.

Do you need guidance on your legal duties?

If you are a company director – or have been asked to be a company director – we can assist you in understanding your statutory and common law duties.

Please contact Kathryn Paisley or any other member of the Rix & Kay corporate and commercial team and we’ll be delighted to help.