Facts
- The case concerns the duties of directors under the Companies Act 2006 in the context of potential insolvency.
- The court examined the level of awareness and actions required from directors when a company may be facing financial difficulties.
- Attention was given to the standards against which a director’s conduct is measured, particularly regarding active involvement in assessing insolvency risk.
- The case discussed the necessity for directors to monitor financial statements, consider market conditions, and seek professional advice if needed.
- Indicators such as regular trading losses, difficulty paying creditors, and reduced revenues were identified as warning signs requiring directors’ prompt attention.
- The proceedings considered the consequences for directors who fail to respond appropriately to insolvency risk.
Issues
- What level of awareness and action is required from directors under the Companies Act 2006 when their company faces a risk of insolvency?
- How should a director’s knowledge, skills, and steps taken to inform themselves about the company’s financial status be evaluated?
- What warning signs of insolvency must directors recognize and address?
- What are the consequences for directors who fail to take proper action in response to insolvency risk?
Decision
- The court held that directors must actively assess the company’s financial health and not passively rely on assurances from others.
- Directors are obliged to take reasonable steps, such as reviewing financial statements and seeking external advice, to inform themselves of the company’s position.
- A director’s experience and skills affect the standard to which they are held, but all directors are expected to take sensible measures to understand financial circumstances.
- Ignoring key warning signs—such as trading losses or cash flow problems—can give rise to personal liability for resulting losses.
- Directors should document their decision-making and reasoning when addressing insolvency risk.
- Failure to meet the required standard can lead to personal liability, disqualification, and financial penalties for directors.
Legal Principles
- The duty to support the success of the company includes an obligation to remain informed of its financial health, under the Companies Act 2006.
- Directors must demonstrate active engagement and individualized judgment regarding financial risks, including assessing warning signs of insolvency.
- Directors are required to consider various options for addressing financial difficulties, act in the interests of the company and its creditors, and record their decisions with supporting reasoning.
- Lack of knowledge of the company’s financial position is not a defence; active involvement is mandatory.
- Directors may face personal liability for losses and be subject to disqualification if they fail in their duties relating to insolvency risk.
Conclusion
Brooks v Armstrong [2017] BCC 99 sets out a clear legal framework for directors’ duties in evaluating and managing insolvency risk, highlighting the necessity for ongoing financial oversight, recorded informed decision-making, and prompt, proactive measures to protect the company and its creditors.