The Collapse of Carillion and Directors’ Duties

The dramatic collapse of Carillion has dominated the news recently with reports suggesting its directors will be investigated. This has brought into sharp focus the importance of good corporate governance and careful management. Responsibility for running a company lies with its directors and Carillion is a good example of how things can go dramatically wrong. Factors contributing to Carillion’s liquidation include overly generous pay for its executives, a large deficit in its pension scheme and lack of transparency of the group’s financial standing. These are issues which are firmly in the control of a company’s directors. While Carillion is a huge Plc with liabilities far exceeding those of owner managed businesses, the responsibilities of its directors and the traps into which they may fall are the same. Although external market forces have a large bearing on a business’s success, adopting good corporate governance, acknowledging directors’ responsibilities and managing your business well, put any business in a better position to succeed. Not only does it make good business sense for directors to adopt certain practices, all directors of UK companies are required by law to comply with certain duties, some of which are set out in the Companies Act 2006. These include a duty to:

• promote the success of the company for the benefit of the shareholders;
• avoid conflicts of interests;
• exercise reasonable care, skill and judgment; and
• declare interests in proposed transactions with the company.

Failing to do so can result in action against the director personally and could result in the company claiming compensation from the director. In addition, not disclosing an interest in an existing transaction or arrangement with the company carries the risk of a criminal fine. While most directors of companies will naturally be complying with these duties, it is possible to be caught out. If you are a director of a company, we advise that you make yourself familiar with your obligations. There are very simple processes you can adopt which, if you should ever be challenged, help show that you complied with your duties. These include holding board meetings in compliance with the Companies Act and ensuring records of these meetings are kept. If, like Carillion, your company finds itself in an insolvency situation, the directors should seek advice as soon as possible. Directors can be personally liable under UK insolvency legislation and the risks in this area are complex, including the potential to be disqualified as a director or being involved in the promotion or management of a company for a period of up to 15 years. If you would like advice in relation to any of the issues raised above, please contact Tilly Clarke, Head of Company Commercial.