Company Director or Management

A company director or senior manager who may be viewed as a “shadow director” has a fiduciary duty of care to the shareholders and a commercial responsibility to all other stakeholders whilst the business is solvent. Once the business moves into the “zone of insolvency” this fiduciary duty progressively moves to the creditors and a director may become exposed to directors’ liabilities in an insolvency if actions or failure to act properly cause financial damages. Whilst the legal definition of insolvency is a “bright line” definition, in most jurisdictions “the failure to pay debts as they fall due in the normal course of business”, the reality may be more nuanced. A director should engage a lawyer to advise on legal obligations but often the lawyer will be better able to advise with the assistance on the business and liquidity issues of a turnaround manager. 

The law and the interpretation of the commercial issues vary within jurisdictions. An overly strict interpretation can lead to a premature filing and loss of value. We have long experience in many jurisdictions across Europe of guiding directors through this difficult and sometimes emotional issue. A combination of commercial business judgment and legal advice, coupled with proper recording of decision making to demonstrate that actions are made with the best possible information and advice, and in the interests of all stakeholders with deference to their ranking in insolvency and security, should be followed. Absent fraud, preference or malfeasance a properly supported and advised business judgement defence, demonstrating actions as in the best interest of the creditors, will avoid the risk of directors’ liability. More detail can be found in BM&T’s Turnaround Guide written for the Institute of Chartered Accountants in England and Wales.