Many people aspire to run their own company and to be a director. They believe that in doing so they avoid the risks and personal liability associated with being a sole trader or a partner. However, in the current financial climate, Robin Humphreys, Associate Solicitor at Thursfields advises that the role and responsibilities of directors are under the spotlight. Failure to comply with a director’s duties under a myriad of complex technical laws can have serious personal consequences.
The Credit Crunch
The 2009 statistics for Insolvency and Liquidations in England and Wales make for a depressing read. 19,077 companies were placed in one form of liquidation or another, an increase of 22% on 2008. In addition, 1468 companies went into receivership, 4161 into administration and there were 726 company voluntary arrangements. The figure for individual insolvencies was worse – 134,142 – an increase of virtually 26%. As the pressure on the economy continues, it is likely that this trend will continue for some time yet. Further, these figures take no account of those businesses which are just about keeping their heads above the waterline of debt or where businesses are being propped up by their directors, third party investors or banks and which, but for that support, would sink and join the statistics.
Personal Liability of Directors
Contrary to popular opinion, a director can be personally liable for his/her company’s debts or for losses caused by his/her actions. There are also potential criminal penalties and the possibility of disqualification as a director. The following are probably the most common ways in which a director can become liable:-
• Wrongful Trading
• Fraudulent Trading
• Director Disqualification
Limited liability has its privileges but also responsibilities. In the current financial climate, there may be a temptation to close ones’ eyes to financial difficulties until it is too late. There can be serious consequences for a director if he/she does. You have been warned!
Robin Humphreys is President of Worcestershire Law Society and an Associate Solicitor specialising in commercial litigation in Thursfields Solicitors’ Commercial Services Department. For more information or a full copy of this article on Director's duties,contact Robin on 01905 730450 or email rhumphreys@thursfields.co.uk