Other than the usual post termination restrictions following a director’s departure, one would assume that directors would no longer be subject to any obligations upon their resignation. Whilst this is strictly true, in that directors’ duties will generally no longer apply once they cease to be a director, there are, however, a few instances whereby directors may still find themselves liable even after stepping down.
Can I even resign?
Resigning (in theory) should be a straightforward process, even for a director. Where there are no contrary provisions in the company’s articles of association or the director’s service agreement, directors may resign at any time by providing proper notice to the company. Ideally, such notice should be given in writing, although this is not prescribed by law. Once notice is served, it may not be withdrawn without the company’s consent, and the resignation shall even be effective if it in itself breaches the director’s service agreement. It is worth noting that any fiduciary duties owed by directors to the company do not affect their power to resign from office, and therefore do not prevent them resigning even if the resignation may damage the company’s business or reputation.
It is the company (not the director) who will find itself in breach of sections 154 and 155 of the Companies Act 2006 if it is left with no directors, and the Secretary of State (via Companies House) would direct the shareholders of the company to remedy the breach by appointing at least one director as required for private companies under the Act. If the company fails to comply with any such direction, an offence is committed by the company and every officer in default, but not the former director whose resignation potentially triggered the company’s breach.
Directors should ensure that their appointment documentation does not contain any restrictions on their resignation so as to ensure that their right to resign, whilst it may be subject to notice, is within their own hands.
Towing the line
Despite not being bound by directors’ general duties and effectively being able to withdraw from their responsibilities without any legal repercussions, there are certain exceptions whereby directors may be caught out even after properly resigning, including where:
- The resignation is tainted by disloyalty or the director has a conflict of interest in relation to the exploitation of any property, information or opportunity of which they became aware during their directorship;
- The director has accepted a benefit from a third party in relation to anything done or omitted to be done before their resignation;
- The director has acted negligently, fraudulently, or in breach of their duties, meaning that they may be held personally liable for any losses incurred by the company;
- An act of misfeasance under section 212 of the Insolvency Act 1986 has occurred, whereby officers and former officers of the company would remain liable in the course of winding up if it appears that such person has misapplied or retained, or become accountable for, any money or other property of the company;
- Wrongful trading under section 214 of the Insolvency Act 1986 is taking place, in that the directors are allowing the company to continue trading when they know, or ought to know, that there is no reasonable prospect of avoiding insolvency, and they have failed to take every practicable step to minimise the loss to creditors; and
- The former director has made personal guarantees in respect of any company loans / debts as these remain binding, regardless of directorial status.
Furthermore, in summary, even if a director leaves the business in a position of financial stability, they could still be subject to investigation should the company become insolvent within the next three years. If a director is found to have played a role in the company’s difficulties in the three years prior to insolvency, the director could be disqualified from being a director for up to fifteen years under the Company Directors Disqualification Act 1986. Acting as a director during such disqualification period can lead to a fine or prison sentence of up to two years.
Indeed, one can see the logic in continuing obligations where a director has not acted appropriately during their appointment, and therefore directors should strive to act properly at all times, and seek adequate advice whilst in their roles in order to protect themselves following resignation. It is moreover important that, although a director’s general duties do technically cease upon resignation, directors looking to resign ensure that the company’s finances are prudently managed whilst in office and that they take the time to deal with any pressing matters before exiting, to minimise any risk of personal liability later on.
This article was posted on 13 November 2023 by our UK member firm Doyle Clayton. If you require further information on the resignation of directors, please either submit an enquiry or contact a member of their Corporate team or speak directly to Leah Caprani, Solicitor at the firm.