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Much ink has been spilled already about the current distress of businesses all the way up and down the oil & gas supply chain, and the contagion of that distress to businesses with a heavy reliance on their oil & gas sector customers/clients.

However, an aspect of this I can’t say I’ve spotted being remarked on is the effect that current market conditions are having on the position of company directors.

Businesses are in distress. Directors/managers/owners are under stress. Relationships among owners/managers are often becoming frayed. Finance partners are taking an ever-closer interest. In the worst cases, liquidators are left poking around reviewing directors’ conduct (armed with the ultimate benefit of hindsight).

All of this being the case, company directors are undoubtedly standing right in the middle of the path of destruction being left by the oil & gas sector crisis. These individuals are facing a much higher than usual risk of personal claims than at any time in recent memory.

Now more than ever, directors have to stay cognisant of their own duties and obligations as company office bearers and wise to the potential personal liability they may incur by virtue of carrying on their role in the midst of such industry upheaval.

Intra-Company Disputes

Intra-company disputes are on the rise. We are talking here about disputes between directors and/or disputes between shareholders.

Where the individuals in formal control of a company are in dispute, the first port of call is a review of the company’s constitutional documents, namely the Articles of Association, along with a review of any shareholders agreement and potentially directors’ service contract(s). Each of these documents will have something to say about what the Directors are empowered to do, how their appointments may be terminated and what mechanisms require to be followed in order to achieve a particular objective.

Where the company’s constitutional documents or associated contracts do not provide a way forward, there are more drastic measures available. An analysis of these measures is well beyond the scope of this post. However, the existence of these court-related measures should be, at least in outline, known to all company directors.

One measure is the so-called ‘derivative claim’ under Part 11 of the Companies Act 2006. Under the 2006 Act, a shareholder may seek leave of the court to bring a claim in the name of the company, potentially against a sitting director (the court’s leave being required because a Director will not sanction action against himself).

Another potential measure is an ‘unfair prejudice’ action under s.994 of the 2006 Act. This is aimed at protection of minority shareholders who consider that the company’s affairs are being run in a manner (by the directors) which is unfairly prejudicial to their interests.

Finally, when an intra-company dispute has become intractable there is the potential for the nuclear option of a petition to the court for a just and equitable winding up of the company.
The company director should at least be aware that these measures exist given that each of these actions will inevitably lead to the director’s own conduct being more or less right at the centre of intense investigation and scrutiny.

Claims In Respect of a Director’s Past Conduct

Perhaps you have recently resigned as a director, perhaps jumping from a sinking ship. Maybe that ship was simply going in a different direction. Either way, you are not necessarily safe.
There are all manner of reasons why, particularly in troubled times, the remaining/new directors may wish to investigate the conduct of a former director. It may be that monies are considered to be owed to the company by the director (director’s loan account).

It may be that certain decisions, questionable in hindsight, were made and there is pressure on the current Directors to review how the company got into its present position. It may be that there are politics in play which lead to the making out of the former director as ‘the bad guy’. All of these things can lead to claims by the company against a former Director for either repayment of money or damages in respect of an alleged breach of the various Directors’ duties.

It’s not just the new board of directors you need worry about either. It’s also a future liquidator of the company. With the increase in liquidations arising out of the current oil slump, there are plenty of disgruntled creditors looking to pressure liquidators to investigate vigorously the company’s affairs and the conduct of its directors. This is particularly exacerbated where there is a director with obvious assets or relatively deep pockets from which a contribution to the creditors’ pot might come. This is common in the oil & gas sector at present.

The liquidators’ investigations can lead to proceedings against former directors for payment and/or claims for breach of directors’ duties. On top of that, the liquidator is keeping an eye out for any one of the various potential claims that can be made out against a director under the Insolvency Act 1986 (wrongful trading, fraudulent trading, misfeasance, preference payments). There is also the risk of a directors disqualification order to boot.

Our experience is that these types of claims are not as uncommon as is sometimes thought. We are advising in a number of such claims at present and anticipate there will be more to come shortly.

Conclusion

Given the particular risk of personal claims at this point in the economic cycle, we suggest that all directors should be live to their duties and obligations to the company, its shareholders and to its creditors. Taking appropriate advice early may well save a huge amount of time, risk and cost further down the line.

Stronachs operates a commercial disputes Helpline which consists of a no-cost, 30 minute telephone consultation. For the Helpline, please call 01224 845977.

Robert McDiarmid, Senior Associate

Chambers UK 2018

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