Companies Act and a directors fiduciary duties

Published: 12/02/2024 By Andrew Bailey

It is not uncommon for a company director to be unfamiliar with the Companies Act and their fiduciary duties. Many businesses are struggling with financial difficulties so getting decisions right when operating in this zone of insolvency is important.

Prompted by a recent conversation with a business owner the following could be considered when making decisions to ensure those duties are not breached.

- Use common sense
- Would an independent third party (not your best friend or the bloke down the pub) understand your rationale and consider the decisions reasonable?
- Could you comfortably sit in a room with someone interrogating your decisions and be able to explain why you made those decisions?
- Don't blindly follow the advice of others.

I attended an initial meeting recently with some directors. They had prepared an exhaustive list of questions which we ran through in detail so I could explain everything.

One of the directors explained that they were owed money personally by the company and so was one of their connected companies. Amongst other things we talked about the following.

We talked about when companies are in the zone of insolvency and the need to switch their focus to acting in the best interests of creditors rather than shareholders.

We talked about ensuring that they did not incur credit when they knew that particular supplier could not be paid in due course.

We talked about preferring themselves by repaying themselves or other connected parties.

We talked about the insolvency practitioner's duties to investigate the affairs of the company and the director’s conduct.

This particular director explained that his accountant had advised him to repay himself and the connected company before it was too late. The advice from the accountant was that the insolvency practitioner may pursue repayment but it was more than likely that a settlement could be reached.

The director asked me for my views.

I considered my response in order to put my blunt answer in the most polite terms possible but in the meantime he made the following points:

- I think I know the answer;
- It is not the right thing to do;
- I suppose if we entered into these types of transactions it is likely to make you have concerns about our conduct generally;
- You are then more likely to assume we would have done similar previously;
- It just adds stress in the knowledge you will be pursuing us for the monies.

I explained that he had answered his own question but added:

- Others (including professionals) may give you advice but it is easy for them to do but you are the ones that suffer the consequences;
- Whatever you are doing, consider how a third party would view it. Is it reasonable?
- Do the right thing and sleep at night.