YOUR RIGHTS AND RESPONSIBILITIES AS A DIRECTOR OR
OWNER OF A BUSINESS IN CRISIS

It's Always Your Problem

As a director, the law says it is up to you to keep a finger on your company's pulse and to call for help if necessary. Directors of limited liability companies are personally liable for the debts of a company if trading continues after there is no longer any reasonable prospect of avoiding insolvency. These responsibilities apply to all directors - not just those with a stake in the business. And, it's no excuse if you are 'just the sales/manufacturing/personnel director': all directors have a legal responsibility to be aware of their business's financial position.

Since 1986, the Company Directors' Disqualification Act has raised the spectre of disqualification for directors who do not take their responsibilities seriously. This is no idle threat. 1767 directors were disqualified in the two years up to 1997. Most were disqualified for periods of between two and five years but nearly 30 per cent were banned for more than six and up to 15 years.

Company failure does not automatically lead to being disqualified as a director, to being criminally charged or to the enforcement of personal liability. The likelihood is still that the vast majority of the unaware or incompetent will not be penalised while resources are concentrated on cases where other, more serious offences appear to have been committed.

A lawyer will tell you that your potential liabilities may arise due to either wrongful trading, fraudulent trading, preferences, transactions at an undervalue or misfeasance. As a director you may have considered your actions were justified at the time and you may be able to defend that position. However, the responsible director should not ignore the problems until either they go away or the company is forced into liquidation. The other extreme, that of ceasing to trade as soon as problems appear may seem low risk - but is hardly going to appeal to the determined, but struggling entrepreneur.

DO NOT FORGET THAT YOU MAY BE PERSONALLY LIABLE FOR SOME DEBTS. PERSONAL LIABILITY CAN OFTEN OCCUR WHEN PERSONAL GUARANTEES HAVE BEEN GIVEN BY DIRECTORS EITHER SOLELY OR JOINTLY.

Bank borrowings, leases on properties and HP/lease agreements often require personal guarantees. Sometimes, a personal guarantee is the only way that a creditor will supply goods. It is not uncommon for a director to have forgotten that these guarantees exist, only for them to re-emerge - as a rude shock - post insolvency. Their effect can be shattering.

However, for business owners, it is even more important to keep one eye always on the business's financial health - financial failure means losing your investment. For those with personal guarantees, it could even mean losing your home. For some, the prospect of personal bankruptcy could be looming.

If you think your company could be heading towards insolvency, seek early, professional advice, both on your responsibilities as a director and on your personal position.

The success of any rescue attempt is dependent upon early identification of the problems. It requires honesty and openness from everyone involved and it requires commitment.