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Directors and IVAs

A recent case, The Tarzan Trust v Wilson and Others, has a potentially serious effect on the position of a director who has entered into an Individual Voluntary Arrangement.

In this case the company had four directors, with the shareholding split equally between two of them; there was a dispute as to which director was the chairman of the board; two of the directors signified they would vote for one shareholder and two for the other, and so the company was deadlocked.

The deadlock was effectively resolved when the claimant shareholder, realising that two of the directors had entered into IVAs sought a declaration from the Court that they had vacated their offices as directors. The declaration was granted.

It is not unusual for company directors to enter into a Voluntary arrangement when they run into personal financial difficulties – and with the appetite for personal credit in the UK at current levels – it might well be an increasing trend in the future. But if their company has adopted the specimen set of Articles set out in the Companies Act of 1985 without any modification, then Article 81 of Table A provides for the ‘disqualification and removal of directors’ if he becomes bankrupt or makes any arrangement or composition with his creditors generally’.

The same provision appears in Table A of the 1948 act at article 85 and so appears in many companies’ articles.

An IVA is an arrangement and a composition with creditors and so any director whose company adopts Article 81 must vacate office on the date the IVA is made. Of course he may seek reappointment immediately and can then continue as a director during the period of the IVA – but not so if he a bankrupt.

A situation can therefore arise where a director unaware or unadvised of the provision of the Article 81 continues in the belief that he is a director involved in the management of the company, whereas he is automatically vacated from office by virtue of entering the IVA.

This is where potentially difficult consequences can arise and where the director needs to consider his position –

• If he fails to vacate office and continues to purport to act on behalf of the company he might be acting outside the scope of his authority and may be personally liable to third parties with whom he enters into contracts with the company
  
• If he continues in office after he should have vacated he will certainly be regarded as a shadow director as defined in s.741 of the Companies Act 1985.

Of course you could take the view that this case is unlikely to create serious consequences for a client in the future, but in a litigious society with an increasing emphasis on regulation and compliance you could argue that the court decision should be worthy of note and action.

Advisors to newly formed and existing companies might consider it appropriate to vary or amend the specimen Article 81, so that the situation described will not arise. They should seek guidance of an experienced Commercial Lawyer in this respect.

June 2006

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