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CMS: Companies in distress: directors’ duties and helpful tools

CMS have launched a programme that helps boards to consider when companies are in distress how directors need to review and assess their responsibilities and duties. Many businesses are experiencing financial challenges as they grapple with a convergence of headwinds, including supply chain friction, labour shortages, surging inflation and rising interest rates.

When a company is in financial difficulty, the responsibilities and duties of its directors can change, depending on the financial position of the company. There are scenarios in which directors must have regard to the interests of creditors and potentially even prioritise those over the interests of shareholders.

If the applicable duties are not properly discharged, directors can face personal liability and/or disqualification. The CMS briefing, Companies in distress: directors’ duties and helpful tools, outlines the risks for directors, practical steps that can be taken to avoid personal liability and the tools available to help with restructuring and rescue of companies in distress.

An awareness of the issues is also important for directors of healthy companies, for several reasons. Firstly, the financial position of a company can decline very quickly, sometimes unexpectedly. Secondly, a healthy company may have commercial dealings with a counterparty experiencing financial difficulty - being aware of the issues will help anticipate how that counterparty may behave in ongoing dealings and negotiations.

Directors’ duties considerations may influence:

  • whether the company should continue to trade;
  • whether to obtain specialist advice (such as contingency planning advice from an insolvency practitioner);
  • the time available for key stakeholders to agree the terms of a financial restructuring or other measures; and
  • what the company may and may not be able to do pending completion of a restructuring

This situation can be challenging for both the board and the board director. You can find out more by following this link.




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