knowledge 3 February 2016 |

Directors’ Duties Clarified

There can be vast differences in the scale and complexity of companies, ranging from small ‘family’ incorporated businesses to multi-national entities with stock exchange listings. Nonetheless, in its recent decision in Re Walfab Engineering Ltd¹, the Court of Appeal has re-affirmed that no material distinctions exist in the company law obligations of a director of any type of company, according to the scale and complexity of the relevant company.

Passive Directors, Active Duties

Re Walfab Engineering Ltd concerned applications by the Director of Corporate Enforcement to the High Court to disqualify or restrict directors who had been on the board of certain small companies when those companies became insolvent even though the relevant boards had not taken any steps to wind up the relevant companies. The companies had failed in the period of economic decline into the 2008 recession. Some of the relevant directors had played merely a token role in the management and governance of the relevant companies, in some cases not being in any meaningful way engaged with their statutory responsibilities. The companies had failed to file annual returns for a number of years.

Despite a clear line of judicial authority to that point the High Court declined to make any disqualification or restriction order against the relevant directors on the basis that the recession-derived practical context had “changed utterly”. Regarding the poor governance in and breaches of statutory obligations by the relevant companies, the High Court made a concession to the fact that the relevant directors were “not professional directors, [did] not possess professional qualifications, and [had] never served at the helm of large quoted enterprises.”

The Court of Appeal held that these considerations were irrelevant to assessing whether a director has performed his or her statutory role: “It matters not that they be directors of family companies, or be at the helm of large or quoted enterprises. Neither do the qualifications of the directors or the economic challenges that the companies may be facing affect the obligations of directors to act responsibly in respect of an insolvent company.” The court concluded: “It would be contrary to the whole notion of proper corporate regulation that passive directors would be exonerated from liability or relieved from disqualification or restriction on the basis of the passive nature of their role.” 

Comment

Although the decision was in the context of insolvent companies and applications for disqualification and restriction of directors, the principles in Re Walfab Engineering Ltd are equally applicable to general company law.

This decision does not ‘break new ground’ in law. Rather, it re-affirms what had been the well-established position up to 2014 but which had been challenged by an incorrect decision of the High Court at that time. Following this recent decision of the Court of Appeal, the message to directors is again clear: as an officer of the company, you have a constant set of statutory obligations and responsibilities and these are neither increased nor reduced in any way by reference to the scale or complexity of your company or the nature of its business. This is so whether the company is trading profitably (in which case your obligations are to the company itself) or is insolvent or facing insolvency (in which case your obligations are to the company’s creditors).

The decision in Re Walfab Engineering Ltd also illustrates the importance of a board receiving training in the duties and responsibilities of a director, both upon first appointment of each director and regularly thereafter to update the directors on relevant developments. 

Guidance on some of the key statutory duties and responsibilities of a director is available here.