Trusting Parents:Risk for UK Directors

How far should a director of a subsidiary company trust their parent company?

We are seeing UK based directors considering the position of UK based subs where Ultimate Beneficial Owners or parent companies are, or may be, subject to sanctions.?The concern is moral as well as commercial for many; the parent company money is not wanted.?Sanctions cases are in one sense the easy ones though:?The UK directors cannot rely upon a trapdoor being opened and resources being poured in from up the corporate tree. ?

Other UK directors have harder decisions:?Consider the following, typical scenario, which we see when advising subsidiary boards:?UK sub with operational board, but one statutory director, based abroad:?Balance sheet insolvent, relying upon foreign parent company guarantees for working capital:?Cash pooling operating so that at the end of every day money being pooled centrally out of the UK.?Imagine the music stops because the parent is bust.?Alternatively, the parent is sanctioned or simply decides it no longer wants to play in the UK.?Where does that leave the board in the UK?

The out of jurisdiction director may not care if he will never set foot in UK or EU or other friendly states.?But what of the UK ops board? ?Should the CEO, CFO, General Counsel and so on be worried??Yes, here is the rub:?They may not be listed at companies house but they may well be de facto directors with exactly the same duties as statutory directors in terms of the Companies Act 2006.

So in our scenario the UK based “directors” are left facing the potential of personal claims or even criminal investigation and prosecution. ?

Here are a few tips for those leading in operational boards:

1. Whether statutory appointees or not, they should have the benefit of independent legal advice and not just rely on advice provided to the parent co;
2. The UK sub should always, no exceptions, understand who the UBO is, and be comfortable with that;
3. The UK board should have appropriate D&O insurance in place;
4. Indemnities from parent company/UBO should be sought (although granted in these scenarios indemnities can sometimes be pretty worthless);
5. If the otherwise insolvent UK sub continuing to trade based on parent company support advice should be taken on carefully documenting why it is in the interest of creditors for that to happen, and what safeguards are in pace;
6. Cash pooling ought only to happen with proper advised agreements in place; and there will be times where it is legally impossible to justify;
7. Document communication with parent company thoroughly; and
8. Take advice proactively, early, meaningfully, and act prudently upon it.

BBM Solicitors are restructuring specialist solicitors.?Eric Baijal and Jennifer Simpson lead our team advising boards on their duties.?Contact us to discuss how we can help.