If your company is struggling or alternatively worse, may have to consider an insolvent end or rescue for the company, directors must remember that it is the duty of an office holder in insolvency (IP) to realise the assets of the company.
The IP’s duties include investigation of what funds are due or may be due to the company.
This invariably includes an early examination of funds received prior to insolvency by directors of the company whether by loan, by ad-hoc distribution/drawings or by dividend.
Prior to 1 October 2007 director’s loans were generally not permitted , however, since then, the prohibition has been lifted (s.197 of the Companies Act 2006 (the Act)).
The concept of ‘director’s loan’ is open to wide abuse (one of the reasons why it was originally prohibited). For this reason the law imposes stringent controls and obligations on the company in the documenting and making of such loans or other distributions/drawings/dividends to directors.
In owner managed businesses or modest quasi partnerships, office holders are well aware that corporate governance (dotting I’s and crossing T’s) is often overlooked amidst getting on with the company’s core business.
The Courts will have limited sympathy for informality.
“…persons who have conducted the affairs of limited companies with a high degree of informality…cannot seek to avoid liability or be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available.”
The scope of this blog is briefly the extent to which:
- IPs can pursue co-directors of borrowers who cannot pay
- Offer informative guidance on how advance planning can minimise the risk of having to repay your co-directors’ loans if they cannot.
The Act (s.213) addresses the consequences of failing to ‘dot I’s and cross T’s’ in respect of directors’ loans or other payments.
Relevantly, and in simple summary it provides:
- Those receiving loans not properly constituted may have to repay them
- Those authorising a co-director to receive a loan or payment may have to repay it.
There may be relief or a ‘defence’:
- When the loan was entered into the relevant director did not know that the ‘relevant circumstances constituted the contravention’
- Or the payment is affirmed within a reasonable time.
Plainly, it is highly undesirable for you to have to repay payments taken from the company by your co-directors, but there can be no doubt there is exposure for directors who allow this to happen and do not comply with the rules.
So how do you meet the rules?
Your broad obligations:
“A director is required to exhibit in performance of his duties such a degree of knowledge and skill as may be reasonably expected for a person with his knowledge and experience. A director is required to take in the performance of his duties such care as an ordinary man might be expected to take on his own behalf “.
The Act (s.171 – s.177) imposes on directors a duty to consider and act in the interests of creditors in particular circumstances.
The case law post 1 October 2007 suggests that taking one or more of the following steps will help directors fend off claims in relation to payments to co-directors:
- Ensure all payments to directors are Companies Act compliant i.e. no ‘wildcatting’ or random drawing or payments to directors
- If such payments have already been made affirm them ex post facto in clear minutes
- If bullying directors insist on payments, ensure reasoned and prompt objection is made exhibiting very clear refusal to authorise such payments
- If governance is informal (i.e. there is no resolution) but approval of payments by shareholders is unanimous it should be made sure this is noted or at the least clearly demonstrable
- Ensure that within the company there is a careful check and recourse for utilisation of the company’s money by directors
- Keep a careful record of the making of all such payments and note the reasons they are being made
- If payments come to light take steps to seek reclamation of them and if in a minority, ensure that your demand for steps to recover is minuted.
These thumbnail rules apply to all payments to directors. For more information, email firstname.lastname@example.org.
 s.330 of the Companies Act 1985
 Arden LJ in v Re Mumtaz Properties Limited 2011 [EWCA SIV 610]
 Dorchester Finance Co Limited v Stebbing 1999 BCLC 501