INTRODUCTION
When a company is unable to meet its financial obligations to creditors on time, it is considered insolvent. Insolvency is as a state where a company's financial liabilities surpass its available resources, rendering it incapable of meeting its debts promptly. The repercussions of insolvency extend beyond the devaluation of shareholders' investments. Job losses, negative impacts on local communities, and even repercussions on the national economy are imminent. Shareholders' interests take a backseat, and the focus shifts to safeguarding the rights and interests of creditors.
In this intricate landscape, the role of directors becomes pivotal. Directors bear significant responsibilities during times of financial distress and insolvency. Their decisions can have profound implications for the company and its stakeholders, particularly creditors. The objective of insolvency legislation is to ensure fairness and protect creditors' rights. In the United Kingdom, the Insolvency Act of 1986 outlines detailed provisions, while in Nigeria, the Bankruptcy Act and the Asset Management Corporation of Nigeria (AMCON) Act of 2015 address insolvency matters.1
Despite differences, both jurisdictions prioritize the hierarchy of creditors in managing insolvency, reflecting a global commitment to safeguarding stakeholders' interests.
Who is a Director?
Directors are pivotal figures entrusted with the day-to-day management of a company, acting as fiduciaries accountable for the well-being of stakeholders including members, creditors, and employees. Their role is legally mandated and critical for the effective functioning of the organization.
Both in Nigeria and the United Kingdom, the legal framework clearly defines directors and delineates their responsibilities. They are not mere title-holders; rather, their significance lies in their position and the fiduciary duties they uphold towards the company and its stakeholders.
The landmark case, Re Forest Dean Coal Mining Co, emphasizes that the various titles assigned to directors, be it commercial trustees or managing partners, are superficial. What truly matters is their recognition of the responsibility inherent in managing a business for the benefit of the company and its diverse stakeholders.
Duties of a Director during Insolvency
When a company becomes insolvent, meaning it can't pay its debts as they come due, directors must shift their focus from promoting the company's success to minimizing losses for creditors. They must avoid actions that could increase debt or harm creditors further, acting with care, skill, and diligence. Timely decisive action is essential, considering the interests of all creditors, not just those with personal ties.
Directors must proactively manage the company's affairs, monitoring its financial health closely. They must decide promptly whether to continue trading or initiate an orderly windup if saving the company isn't feasible, aiming to minimize losses.
Before a receiver is appointed, directors act as fiduciaries for creditors, preparing a comprehensive statement of the company's affairs and being accountable for transactions under their control to the receiver.
Once winding-up proceedings begin, directors have the following additional duties:
- Prepare a detailed statement outlining the company's
financial situation, including its assets, debts, liabilities, and
the names and addresses of creditors. This statement should also
include information about any securities held by creditors, along
with the dates they were obtained.
- Be available to provide a detailed explanation of all
transactions and funds that were under their control to the
receiver.
After the winding-up proceedings has commenced, the directors have the following duties:
- To deliver all company property to the liquidator, including any assets that are under their control or in their possession.
- Not to leave out any significant information in any statement regarding the company's affairs.
- Not to obstruct the production of any documents or records relevant to the company's property or affairs.
OTHER OFFICERS OF A COMPANY
Receivers/Managers
Receivers/Managers, highly skilled professionals specializing in insolvency practices, are appointed to oversee companies facing significant financial challenges. Their role extends far beyond simply liquidating assets; they are entrusted with the crucial task of managing the company's affairs until debts are fully settled. This appointment effectively suspends the powers of the company's directors unless formally discharged.
While receivership significantly limits the company's authority over its assets, it's essential to note that it doesn't dissolve the company's legal existence. Ownership of assets remains with the company, underscoring the importance of allowing the receiver to act in the best interests of all parties involved.
Receivers shoulder extensive fiduciary duties akin to those of directors and can face severe legal consequences for breaches. They are held to a high standard of professionalism, expected to exercise skill, care, and act as fiduciaries of the company. In the case of ex curia receivers (Receivers appointed out of Court), they serve as agents for both the appointing party and the company itself, wielding considerable authority in managing the company's affairs.
Despite their authority, the company retains the right to ensure that the receiver fulfills their obligations and safeguards assets from dissipation. Provisions that attempt to absolve receivers from breaching their duties, such as those regarding good faith and care, are rigorously scrutinized and often deemed void to prevent evasion of liability.
Liquidators
A liquidator is an individual typically appointed to supervise the winding-up proceedings of a company. The roles of a Liquidator is similar to that of the Director, however, the Liquidator assumes control upon his appointment, thereby supplanting unless sanctioned by the liquidator at a General Meeting. While the company retains legal existence until its dissolution, the company's assets remain with the company, not the liquidator. Creditors and contributories retain rights but can't sue on behalf of the company.
The liquidator takes charge of the company's assets, pays creditors, and distributes surplus to the members of the company. Their role encompasses managing the company, settling debts, and distributing remaining surpluses.
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Footnote
1. Pereowei Subai, 'Company Law in Nigeria', (DOK Consults & Research LLP 2023) Page 356
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
