Chris Wiper, Senior Partner at Close Thornton Solicitors in Darlington looks at how directors can find themselves adversely affected by the provisions for insolvency legislation and he offers some practical advice on how to avoid such a situation.

A director of a company may in certain circumstances be made liable for the debts of the company of which he is a director. This might result in the director being personally required to pay some or all of the company’s creditors.

Directors can be found guilty of wrongful trading if he or she carries on business when the director knows that it will not be possible for the company to avoid an insolvent liquidation. It is a defence for a director if he can demonstrate that when he became aware of the likelihood of an insolvent liquidation he took all possible steps to minimise the loss to creditors. However, resigning as a director does not necessarily absolve the director from responsibility.

In order to minimise the risk of being accused of wrongful trading, a director should make sure that:

• potential problems relating to the solvency of the company have been discussed with the other directors
• an accurate record of any discussions has been kept
• the company has adequate up to date financial information

If a director finds himself a director of a company that has become insolvent he should take immediate professional advice.

Under Insolvency Legislation, disqualification orders can be made against company directors. The responsible insolvency practitioner is required to report to the Department of Trade and Industry on the conduct of all company directors involved in an insolvent liquidation. A disqualified person is prohibited from taking part in the management of any company.

The plague of personal liability appears to be spreading. Directors are being targeted by disgruntled shareholders, regulators, auditors and other claimants. The cost of defending these claims aside from the eventual damages award is often beyond the pocket of all but the wealthiest individuals. Recent changes to the Companies Act 1985 have removed the uncertainty over whether insurance cover taken out by companies to meet such claims is void. Such cover is referred to as Directors and Officers (or D&O) Insurance and increasingly companies are taking out such policies. Directors should take note.

For further information on any matter concerning Company and Employment Law, contact Chris Wiper, Senior Partner at Close Thornton Solicitors on 01325 466461.

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