It is tempting to imagine that once a director resigns, they are completely "off the hook" and can then put all issues relating to that company behind them. But that is not the case and directors always have to recognise that the role of director carries with it a special category of duties and statutory responsibilities that can transcend a resignation. This article will look at the following issues:
(i) whether directors' duties can extend to the period after a resignation;
(ii) wrongful trading liability; and
(iii) Companies Directors Disqualification Act 1986.
Do directors' duties extend after resignation?
Until the Companies Act 2006 came into force, the law on directors' duties was entirely based on case law. And the case law stated broadly that conduct after a director has resigned office cannot of itself amount to a breach of duty. That was quite clear and seems to make sense: you are not a director and so you do not owe duties to the company.
The Companies Act 2006 attempted to codify the law of directors duties in sections 170-181, but with the following saving as regards the prior case law:
"The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties."
Thus, in interpreting the "new" codified duties, judges still have to have regard to the prior case law. However, a difficulty in interpretation arises because of s170(2)(a) of the Companies Act 2006, which states: "a person who ceases to be a director continues to be subject to the duty in section 175 (duty to avoid conflicts of interest) as regards to the exploitation of any property, information or opportunity of which he became aware at a time when he was a director". The difficulty that that section raises is that the prior case law was to the contrary effect - i.e., that fiduciary duties did not survive cessation of a director's appointment. So, how could one reconcile the express statutory words in s170(2)(a) and the express statutory duty in s170(4) to have regard to prior case law.
The judge in a recent case (Burnell v Trans-Tag Ltd [2021] EWHC 1457(Ch)) has resolved that conundrum as follows: -
"Notwithstanding the instruction in s170(4) …, in my view, it is not permissible as a matter of construction to ignore the plain words of the statute. Accordingly, I agree… that the extended duty imposed by s170(2)(a) is a continuing duty and that it must therefore be possible for a breach of that continuing duty to be founded on acts which take place after a director has resigned his or her directorship."
What the Burnell case highlights is that even after resignation, a director is not free to act wholly as they see fit in connection with the company. Resignation does not grant a former director a complete "free pass" as regards their duties to the company. The director must remain cognisant of the interests of the company and must act accordingly, having due regard to those interests. That is not surprising and is not difficult to understand. One can easily see for example that a person in possession of a company's commercially sensitive information where that information was received in the capacity of director, should only ever use that information for the purposes of the company. And once a director has resigned, they cannot have a legitimate reason for using such information. The information had been received by the director subject to an obligation of trust (and that is what the fiduciary duty means, it is an obligation to act in the utmost good faith towards the company. The word "utmost" is key here, the duty is a high and onerous one).
S170(2)(a) does not however extend to all of the duties of a director. It is only the duty in s175 of CA2006 (the duty to avoid conflicts of interest) that it catches. In respect of each of the other duties, it would appear that the previous case law (i.e., that conduct after a director has resigned their office cannot of itself amount to a breach of duty) will still apply.
Wrongful trading
A director is of course not generally liable for the debts of an insolvent company. One of the exceptions to that rule arises under s214 of the Insolvency Act 1986 (the wrongful trading provisions). Broadly speaking, a director can be made liable to contribute to the assets of a company if the director knew or ought to have known that there was no reasonable prospect that insolvency could be avoided, and then failed to take every practicable step to minimise the loss to creditors in the insolvent liquidation.
Where a director is concerned about the financial position of a company, it can obviously be tempting for the director to resign sooner rather than later in order to attempt to avoid (or at the very least minimise) the effects of s214.
The risk of liability under s214 does not fall only upon those directors who remain in office at the time a liquidator is appointed. Therefore, resigning in advance of a liquidation does not free the director from all risk of liability for wrongful trading. This is because wrongful trading liability can arise in respect of any period when the director was a director. If one considers the situation of a company that is on a course that will lead inevitably to insolvency, it will be apparent that it would be nonsensical to allow directors to escape wrongful trading liability simply because they resigned one week (or one month) before insolvency. Indeed, the relevant period for this purpose could be far longer - what is important is the point at which the director knew or ought to know that the company had no reasonable prospect of avoiding insolvency. That point could occur many months, possibly even years, prior to the appointment of a liquidator and it is from that point that the director must take "every step with a view to minimising the potential loss to the company’s creditors as ... he ought to have taken." It is the failure to take such steps that give rise to the liability for wrongful trading; and resigning as a director obviously cannot be said to be taking "every step with a view to minimising" the loss to creditors.
It should be noted that under s214, the court may "declare that the person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper" (our emphasis added). It is clear therefore that any liability under s214 is not necessarily limited to any loss that is caused to creditors that arises solely in respect of the period that the director is a director. Rather the court can require such contribution "as the court thinks proper". The court is entitled to look at what are the likely or inevitable consequences for the company and its creditors that arise from the period when the director was a director, and if the position for creditors later worsened (but such worsening is a natural consequence of what was done or not done while the director remained a director) then the court would no doubt be able to take account of such later worsening of the position in any order against the director/ex-director.
Accordingly, resigning as a director will not necessarily protect the director where there is a subsequent worsening of the position which can be said to flow naturally from the earlier actions or inactions of the director.
Companies Directors Disqualification Act 1986 ("CDDA")
As a final point, it is worth briefly noting that the provisions of the CDDA do not of course cease to apply to a person who has resigned as a director. CDDA applies to anyone who "is or has been" a director. It is the conduct of the person while they were a director that is relevant for consideration for the purposes of CDDA. Accordingly, the risks of disqualification and compensation orders remain in play even after resignation.
Summary
The key issue to understand is that the duties that directors are subject to are very onerous duties. In addition, directors are also subject to specific statutory provisions. To understand the effect of any resignation from office and the timing of such resignation, the resignation must be considered having regard to those duties and statutory provisions as they apply in the context of the specific company. It is certainly not the case that a resigning director walks away from a company entirely - certain duties and risks subsist post-resignation and can be said to come with the territory of accepting the appointment in the first place.
