Directors’ Duties When A Company Is Facing Insolvency

Introduction

It is well established that the fiduciary and statutory duties of directors are generally owed to the company. However, where a company is insolvent or is threatened with insolvency this fundamental principal changes; the duty to act in good faith and to show the utmost care, skill and diligence will become owed by the directors to the creditors.

This does not mean that a company should close down at the first sight of economic difficulty. Although the directors may have no choice but to recommend placing the company in liquidation and distributing the assets for the benefit of the creditors, this may not always be the case. It may be that by trading forward, a more favourable outcome for creditors is achieved. Where it is reasonable to continue to trade, for example in an effort to complete a contract and generate further revenue, the directors will not necessarily be on the hook for reckless trading. This was recognized in Re: Hefferon Kearns Limited