Brooks v Armstrong [2017] BCC 99

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

  1. What level of awareness and action is required from directors under the Companies Act 2006 when their company faces a risk of insolvency?
  2. How should a director’s knowledge, skills, and steps taken to inform themselves about the company’s financial status be evaluated?
  3. What warning signs of insolvency must directors recognize and address?
  4. 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.

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