Supreme Court’s Mainzeal decision: guidance for directors

1 September 2023

David Friar, Tim Fitzgerald and Jesse Wilson

This update is the third in our three-part series on the Mainzeal decision. In part one, we summarised the Supreme Court’s decision. In part two, we considered how the Supreme Court interpreted the duties owed by directors in the Companies Act. In this part, we provide guidance to directors on how to comply with their duties in light of the Supreme Court’s decision in Mainzeal.

Here are the key points for directors:

  1. Directors must continually monitor the performance and prospects of the company. If they fail to do so, they breach their duty of care to the company under section 137.
  2. If the directors’ monitoring reveals a potential for substantial risk of serious loss to creditors, whether as a result of the company’s solvency position or any other adverse factors, they must squarely address the future of the company. A failure to do so is a breach of section 135.
  3. Likewise, if the directors’ monitoring reveals doubt as to whether there is a continuing reasonable basis to believe that obligations to be incurred will be honoured, they must also squarely address the future of the company. If they do not, they will be in breach of section 136.
  4. What does it mean to squarely address the future of the company?
    1. Directors must consider how to address the potential for a substantial risk of serious loss to creditors, or the potential that obligations to be incurred will not be honoured.
    2. The directors must deal directly with the issues that have given rise to concern.
    3. To do this, they may need to take professional or expert advice from sources independent of the company. Where advice has been taken, this will be factored into an assessment of the reasonableness of the directors’ actions.
    4. The directors have a “reasonable time” to assess risk, review the options to meet that risk and decide what course to take. The Court referred to this as the “taking stock” period.
    5. Although directors will not normally be liable for continuing to trade during the taking stock period, that may not be the case if substantial new obligations are taken on without measures in place to allow for them to be met.
    6. If directors fail to address the future of the company in this way, they will be in breach of section 135 or section 136.
  5. What do directors need to do to satisfy themselves that the company should continue to trade?
    1. Directors must follow principles of sound corporate governance, both in terms of developing a strategy for continued trading, and for monitoring progress.
    2. A long-term strategy of trading while balance sheet insolvent is generally not acceptable.
    3. Directors should only decide to continue to trade if the identified risks can be eliminated or sufficiently mitigated.
    4. It may not be reasonable for directors to rely on assurances of support from shareholders or third parties if the assurances are not legally binding or practically enforceable.
    5. Ultimately, the directors must be satisfied that by continuing to trade, they have a reasonable basis to conclude that there is not a substantial risk of serious loss to creditors, and that they can be confident that obligations incurred will be honoured.
    6. If directors decide to continue to trade in the absence of such a reasonable basis, they will be in breach of section 135 or section 136.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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