We are often instructed to consider the general duties and responsibilities of a company director, and whether those had been properly discharged.

The Companies Act 2006 effectively codified, with some revisions, the previous common law rules on directors’ duties, to provide a clear statutory framework. The key responsibility of a director remains that to act in good faith in a way likely to promote the success of a company for the benefit of its members. However, if insolvency arrives or becomes a possibility, the director’s primary regard must shift to the interest of the company’s creditors. This can prove a difficult balance.

Wrongful trading is a principle of UK insolvency law. It requires no intent to defraud, and instead arises when the directors of a company have continued to trade past the point where:

(i) they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation; and

(ii) they did not take every step with a view to minimising the potential loss to the company’s creditors.

The test is not always clear cut. The timing of cash flows or financial support from other group companies may enable even a business that is balance-sheet insolvent to continue to meet its debts as they fall due. Conversely, a business that appears asset-rich may be insolvent if it doesn’t have sufficient ready cash to pay a demanding creditor – funds may be tied up in a long-standing customer debt or in unsold stock.

The directors will often argue that they held a genuine belief that the company was about to turn the corner and trade its way out of financial difficulties (the so-called “blue sky” defence). However, genuine belief is not enough. The belief must be supported by reasonable and robust assumptions. A more objective standard is applied, and directors will be punished, and liable to compensate creditors for any losses incurred, for the failure to carry out their duties with the appropriate degree of skill and care.

We have acted in an expert capacity on a number of matters involving officers (and most often the finance director holding the dual role of company secretary) of failed businesses. This involves the analysis of the financial information that was available at fixed points in the past, and often necessitates the reconstruction of the accounts from source books and records.

Based on that historic financial information, we are then able to assess whether the actions of those officers were fair and reasonable in the context of both the general duties imposed on them and also when compared to our general experience of what generally happens in practice.