Directors’ obligations if a company goes into administration

John Wallace, Solicitor and Managing Director of Ridgemont, says the incidence of cladding subcontractor SD Samuels going into administration mid-contract raises the possibility of its directors facing legal action.

SD Samuels’ administration provides food for thought for all directors and their obligations in the construction sector. Most construction companies are likely to face a challenging time ahead. Years of labour scarcity, increased costs of materials and shortages in supply will all be felt harder in an economic downturn. Even the most conscientious of directors can fall foul of their duties during the insolvency process if they are unaware of their legal obligations.

Insolvency practitioners, whose vocation it is to look after the best interests of a company’s creditors, will often bring legal actions against directors who have failed to meet those obligations. Similarly, in some instances, a creditor may pursue a director for the losses arising from a company’s insolvency.

Held personally responsible

There are a number of ways that directors can be held responsible – for example, if a director has allowed trading to continue when there is no reasonable prospect of the company avoiding insolvent liquidation or administration. In those circumstances, an insolvency practitioner could bring a claim against a director (including de facto or shadow directors) for wrongful trading. A court could order the director to contribute their personal assets to that of the company so creditors can be paid, and the director may face disqualification from holding a directorship in future. Directors could also be disqualified for up to 15 years, as well as having to repay, restore or account for the money or property (with interest).

Worse still, a director found to have continued to trade with the intent to defraud creditors or for another fraudulent purpose will have committed a civil offence, but also a criminal act. Such a person may be imprisoned for up to ten years and fined. In civil proceedings, a declaration may be sought against the director, by an insolvency practitioner, that anyone knowingly party to the fraudulent trading must contribute to the company’s assets.

Similarly, a director may be required to contribute such an amount to the company’s assets as the court considers just if they have been found to have committed misfeasance or a breach of fiduciary duty. Additionally, directors could also face prison time and fines if they allow a company to continue trading with the intent to defraud creditors or other parties.

So what action can directors take to avoid being held personally liable for a company’s debts?

  1. In preparation for the company’s inability to trade, directors should consult their lawyers and accountants on their contingency plans before implementing them.

  2. In the meantime, board meetings should be held weekly, with all decisions informed by up-to-date legal and financial information. Formal resolutions and minutes must be recorded.

  3. Any extension of credit or loan arrangements should be scrutinised.

  4. The board should not approve antecedent transactions (those made prior to the business’ insolvency – they can be reversed by an administrator/liquidator if they caused the insolvency or were made when the company was already insolvent) unless they believe in good faith that it could bring advantage to the company.

To avoid being held personally liable for the insolvency of a company, directors should ensure they are adhering to their duties. It is always important to remember that main contractors are notoriously litigious when faced with financial difficulties caused by a subcontractor becoming insolvent mid-contract, especially in a receding economy.

Find out more about Ridgemont at ridgemont.co/index.html

Read about SD Samuels’ administration in Construction News at bit.ly/CN_SDSamuels

Image credit | Shutterstock

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