Directors must recognise that the role of director imposes a special category of duties and responsibilities and that these can survive a resignation. Two important issues are: whether a director’s duties can extend to the period after a resignation; and wrongful trading liability.
Directors’ duties
Until the Companies Act 2006 came into force, the law on directors’ duties was entirely based on case law. And the case law stated broadly that conduct after a director resigned could not amount to a breach of duty. When you cease to be a director, you cease to owe duties.
The Companies Act 2006 codified directors’ duties in sections 170-181, but with the following saving as regards the prior case law: “The general duties shall be interpreted and applied in the same way as common law rules…, and regard shall be had to the corresponding common law rules…in interpreting and applying the general duties.”
So the prior case law was not entirely redundant. But this gives a particular difficulty where the statute and prior case law conflict.
Section 170(2)(a) of the Companies Act 2006, states that “a person who ceases to be a director continues to be subject to the duty in section 175 (duty to avoid conflicts of interest)”. As noted above, the prior case law was to the contrary effect in that fiduciary duties did not survive cessation of a director’s appointment.
The judge in a recent case (Burnell v Trans-Tag Ltd [2021] EWHC 1457(Ch)) has resolved the conflict by stating that “the extended duty imposed by section 170(2)(a) is a continuing duty and that it must therefore be possible for a breach of that continuing duty to be founded on acts which take place after a director has resigned his or her directorship”.
Accordingly, even after resignation, a director is not free to act wholly as they see fit in connection with the company. The director must continue to have regard to the interests of the company. That should not be difficult to understand if one appreciates the true nature of the office of director. A director is subject to fiduciary duties and those duties are not like ordinary contractual duties. Fiduciary duties impose an obligation to act in the utmost good faith and the word “utmost” is key here—the duty is a high one and an onerous one.
However, the principle outlined in the Burnell case does not extend to all of the duties of a director, but rather only the duty to avoid conflicts of interest set out in section 175 of the Companies Act 2006. In respect of the other duties, the previous case law position (that conduct after a director has resigned cannot of itself amount to a breach of duty) will continue to apply.
But even if the Burnell decision has limited effect, resignation is not always the end of risk for a director.
Wrongful trading
One of the exceptions to the principle that a director is not liable for the debts of an insolvent company arises under Section 214 of the Insolvency Act 1986 (wrongful trading).
A director can be made liable to contribute to the assets of a company if (i) the director should have known that there was no reasonable prospect of avoiding insolvency and (ii) then failed to minimise the loss to creditors.
It is common for a director who is concerned about the financial position of a company to consider resigning sooner rather than later to attempt to mitigate the wrongful trading risk.
Wrongful trading liability can arise in respect of any period when the director was a director. Resigning in advance of a liquidation will not give 100% protection from risk of wrongful trading.
Consider a company that is on a course that will lead inevitably to insolvency. It will be apparent that it would be unjust for the directors who set the company on that path to escape wrongful trading liability, simply because they resigned one week (or, indeed, one year) before insolvency.
What is important is the point at which the director should have appreciated that the company was not going to avoid insolvency. That point could easily occur months before a liquidation. It is from that point that the director must take every step to minimise the potential loss to the company’s creditors.
It is the failure to take such steps that gives rise to the liability for wrongful trading; and resigning as a director obviously cannot be said to be taking “every step with a view to minimising” the loss to creditors.
Under s214, the court may “declare that the person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper”. Accordingly, it is the court that has discretion.
The court will examine the likely or inevitable consequences that arise from the period when the director was a director. If any later worsening of the creditor position was a natural consequence of what was done—or not done—while the director was a director, then the court would be able to take account of such later worsening in any order.
Accordingly, resigning after setting a company on an inevitable course towards insolvency will not necessarily protect the director from a wrongful trading order.
Look before you leap
The key issue to understand is that the duties that directors are subject to are very onerous duties. In addition, directors are also subject to specific statutory provisions.
To understand the effect of any resignation from office and the timing of such resignation, that resignation must be considered in the context of the specific company.
It is certainly not the case that a resigning director walks away from a company entirely—certain duties and risks subsist post-resignation and should be considered to have come with the territory of accepting the appointment in the first place.
Alan Meek is a partner at Morton Fraser LLP