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of directorial duties but leave directors’ duties to creditors to be governed by an uneasy combination of statute and common law.

Statutory duties and liabilities

General duties

The Companies Act 2006 offered the first statutory formulation of directors’ duties and these are set out in sections 170–7.92 (These duties are separate from the company directors’ disqualification legislation.) Section 170 states that the statutory provisions replace the duties of directors at common law and equity but section 170(4) provides that the general duties shall be interpreted and applied in the same way as common law rules or equitable principles and that: ‘regard shall be had to the corresponding common law rules and equitable principles in interpreting those general duties’.93 The specific duties are: to act within powers (section 171); to promote the success of the company (section 172); to exercise independent judgement (section 173); to exercise reasonable care, skill and diligence (section 174);94 to avoid conflicts of interest (section 175); to desist from accepting benefits from third parties (section 176); and to declare personal interests in proposed transactions or arrangements (section 177).95

92Ss. 171–4 came into effect on 1 October 2007 and ss. 175–7 came into effect on 1 October 2008. See further S. Griffin, ‘The Regulation of Directors Under the Companies Act 2006’ (2008) 224 Sweet & Maxwell’s Company Law Newsletter 1; L. Sealy, ‘The Statutory Statement of Directors’ Duties: The Devil in the Detail’ (2008) 228 Sweet & Maxwell’s Company Law Newsletter 1.

93See D. Milman, ‘Directors and the Transition to the New Regime’ (2007) 8 Sweet & Maxwell’s Company Law Newsletter 1. What constitutes ‘interpreting’ is a difficult point – especially when the terms of s. 172(1) are subjective but the case law imports objective tests, as in Charterbridge Corp. Ltd v. Lloyds Bank Ltd [1970] 1 Ch 62: see A. Keay, ‘Section 172(1) of the Companies Act 2006’ (2007) 28 Co. Law. 106.

94As noted above, the s. 174 duty is akin to that of s. 214 of the Insolvency Act in its objective expectation of the reasonably diligent person possessing the general skill and experience of a person carrying out the functions of the company director in that company, and is consistent with the common law: see Re D’Jan of London Ltd [1993] BCC 646.

95A statutory derivative action under s. 260 of the Companies Act 2006 allows a member of the company to proceed against a director for a breach of duty or trust or an act or omission involving negligence or default: see G. Pendell, ‘Derivative Claims: A Practical Guide’ (2007) 20 Sweet & Maxwell’s Company Law Newsletter 1. See also A. Keay, ‘Can Derivative Proceedings be Commenced when a Company is in Liquidation?’ (2008) 21 Insolvency Intelligence 49.

For insolvency lawyers, section 172 is of special interest.96 It applies a highly subjective standard in demanding that directors act in the way they consider, in good faith, will be most likely to promote the success of the company for the benefit of the members as a whole. They must, in doing so, have regard to (inter alia): the interests of employees; the need to foster the company’s business relationships with suppliers, customers and others; and the impact of the company’s operations on the community and the environment (section 172(1)). (It may be presumed that ‘suppliers, customers and others’ in section 172(1)(c) includes creditors.) Regard must, furthermore, be had to the need to act fairly as between members of the company. With respect to creditors, section 172(3), as noted above, states that the section 172 duty has effect ‘subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company’.97 The legal effect, accordingly, is that common law duties are not negated and directors will continue to have an overriding duty to consider or act in the interests of creditors if the company is insolvent or on the verge of insolvency.98 The Act thus appears to accept the ‘common law principle of husbandry adopted by the Court of Appeal in West Mercia Safetywear’.99 What the 2006 Act does not do is provide clarity on when the section 172 duty (to have regard to the list of considerations listed therein) gives way to the established duties to consider or act in the interests of the creditors. As noted, it is often extremely difficult, in practice, to identify the point at which the value of a business falls below the level needed to pay the creditors in full – and the law is not user-friendly in setting out the directors’ obligations at a given time. On the one hand, judicial decisions create a ‘zone of uncertainty’ in which creditor interests have to be taken into account as the company

approaches insolvency and, on the other, the troubled director will be attuned to his or her obligation to observe the section 172 duties.100 For

96See Keay, ‘Section 172(1) of the Companies Act 2006’.

97The Explanatory Notes to the 2006 Act (para. 332) indicate that s. 172(3) will ‘leave the law to develop in this area’.

98The other sections of the 2006 Act do not contain a similar provision and so all other duties would appear to apply regardless of the company’s solvency.

99Milman, ‘Directors and the Transition to the New Regime’.

100See Baird, ‘Legal Update’, p. 11: ‘The problem being that, if a company is not in the “zone of uncertainty”, it becomes much easier for a director to say that he must “have regard to” things that are contained in s. 172 … Lawyers will have a great deal more to do to make it clear that the “have regard to” matters … must not be allowed to distract directors from doing the right thing when the company’s solvency is in question.’

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the courts and legal observers, a residual question is whether the section 172 duties will impact on current approaches to the reorientation of duties as companies approach insolvency.

Fraudulent trading

Turning to statutory provisions creating personal liability, directors may be liable to compensate creditors where they have been party to fraudulent trading by the company. Section 213 of the Insolvency Act 1986 provides:

(1)If in the course of the winding up of the company it appears that any business of the company has been carried on with intent to defraud creditors of the company, or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2)The court, on the application of the liquidator, may declare that any persons who were knowingly parties to the carrying on of the business in the manner above mentioned are liable to make such contributions (if any) to the company assets as the court thinks proper.

The purpose of this provision is to compensate rather than to punish. Thus it has been said that there must be a connection between the losses caused by the fraudulent trading and the quantum of compensation and that the court has no power under section 213 to impose a punitive element in the compensation order made.101 The section has a long history and, indeed, was introduced particularly to protect unsecured creditors from the abuse of ‘filling up’ floating charges.102 Now, however, it is recognised103 that the aim of fraudulent trading provisions – to discourage directors from carrying on business at the expense of creditors – is severely restricted by the requirement of dishonest intent104 and

101Morphitis v. Bernasconi [2003] Ch 552, [2003] BCC 540 (a contrast with cases under the prior legislation: see e.g. Re Cyona Distributors Ltd [1967] Ch 889). In Morphitis it was stated that the provision catering for punishment was (the then) s. 458 of the Companies Act 1985 which made fraudulent trading a criminal offence. On the nexus between losses and compensation amounts Morphitis has been followed by Morris v. Bank of India [2005] BCC 739.

102A process whereby directors lent money secured by floating charges to their asset-less companies, bought stock on credit which became subject to the floating charges, then appointed receivers who sold off the stock to satisfy the directors’ charges, leaving the creditors ‘whistling’. Now, however, the company would have to be kept afloat for two years to avoid the operation of the Insolvency Act 1986 s. 245: see ch. 13 above.

103See Cork Report, p. 398.

104In the subjective sense: ‘actual dishonesty … real moral blame’ per Maugham J in Re Patrick and Lyon Ltd [1933] Ch 786 at 790. Maugham J noted that the provision was ‘by

the courts’ insistence on strict standards of pleading and proof.105 Such an approach may be understandable for criminal liability under section 993 of the Companies Act 2006, but its imposition on the civil liability provided for in section 213 of the 1986 Act has led to the latter section’s virtual obsolescence. This obsolescence is now even more apparent with the advent of section 214, the ‘wrongful trading’106 provision. What is more, the Court of Appeal appears to have adopted a concept of intention for the purposes of section 213 that is even harder to demonstrate than would be the case in the criminal law. In criminal law it is established by the House of Lords that a person ‘intends’ the consequences of an action that are foreseen as virtually certain – and that whether those consequences were desired or were the main motive for the action is irrelevant.107 In the Court of Appeal case of Morphitis v. Bernasconi,108 however, Chadwick LJ did not treat the phrase ‘with intent to defraud’ as a composite whole, finding that fraud alone is not sufficient to ground liability and defining the word ‘intent’ in isolation. Thus, according to Chadwick LJ, there had been no ‘intent to defraud’ since the aim or objective underlying the company’s (TMC (1)) trading was to protect the directors from liability under section 216 of the Insolvency Act rather than to defraud creditors or in particular the landlord. It would, however, have been equally possible to recognise that the purpose behind the scheme was to enable TMC (1) to divest itself of onerous leasehold premises while simultaneously protecting the TMC brand or, alternatively, as an attempt to minimise rent payments while forestalling the

no means easy to construe’. See also Re William Leach Brothers Ltd [1932] 2 Ch 71; Re L. Todd (Swanscombe) Ltd [1990] BCC 127; R v. Miles (1992) Crim L Rev 657; Re Bank of Credit and Commerce International SA (No. 14) [2003] EWHC 1868 (CA). Liability will extend, however, to all parties who knowingly participate in the company’s fraudulent trading (which covers not only parties with actual knowledge but also those who were deliberately blind or recklessly indifferent to the fraudulent nature of the transaction): see Morris v. Bank of India [2005] BCC 739 and I. McDonald and D. Shah, ‘Fraudulent Trading’ (2005) Recovery (Winter) 18.

105Ian Fletcher has noted the degree of uncertainty ‘whether civil or criminal proceedings for fraudulent trading will prove to be successful in any given case’: The Law of Insolvency (3rd edn, Sweet & Maxwell, London, 2002) p. 706.

106Section 214, according to the marginal note, is concerned with ‘wrongful trading’, but it is notable that the word ‘trading’ is not used in the text of the Act: see further L. S. Sealy and D. Milman, Annotated Guide to the Insolvency Legislation (10th edn, Thomson/ Sweet & Maxwell, London, 2007) vol. I, p. 233.

107See e.g. R v. Woollin [1998] 3 WLR 382 at 389.

108[2003] Ch 552, [2003] 2 BCLC 53 (which concerned application of (the fraudulent trading) s. 213 of the Insolvency Act 1986).