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29th Mar 2024
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Directors in the dark on insolvency

by The Editor at 10:16 28/09/06 (News)
More than half of company directors could become personally liable for their company's debts in the event of insolvency, due to ignorance of basic company law, according to law firm Browne Jacobson.
A survey of 220 senior decision makers in UK companies, contained in Browne Jacobson’s Sleepless Report, polled directors on their awareness of basic aspects of company law. The majority were found wanting in three crucial areas: insolvency, limited liability and debt.

Insolvency ignorance
More than half (52 per cent) of directors were ignorant of their company’s procedures to avoid trading while insolvent. More than a quarter (26 per cent) of directors admitted that their company had no process in place to avoid trading while insolvent and a further quarter (26 per cent) of business leaders were unsure of whether or not their company had such procedures.

Continuing to operate while insolvent is illegal and directors could be liable for wrongful trading. When asked about their responsibilities as a company director, just 41 per cent of directors were aware that their duty in the event of insolvency is to act in the best interest of their firm’s creditors.

Half of directors believed that their duty was to act in the interest of the company, five per the bank, and a rogue four per cent believed that they should act in their own interest!

Failure to act appropriately in these circumstances would leave company directors personally liable for company debts and forced to sell their own assets to cover this.

Dominic Offord, insolvency expert at law firm Browne Jacobson, said: “Company directors must take the legal obligations that come with running a company seriously. The consequences of not complying can be drastic, not only to the firm, but also to directors personally.

“Our research reveals a tendency amongst businesses to think that company law doesn’t apply to them. They should be aware that inadequate attention to legal matters can lead to insolvency, prosecution for wrongful trading and even personal bankruptcy.”

Limited liability
Browne Jacobson’s report also reveals that up to one third (32 per cent) of firms are trading without adequately limiting their liability, by failing to include limited liability clauses in commercial contracts – an omission which could leave them exposed to multi-million pound claims, even on the smallest of contracts.

Bad debt
Companies are even leaving turnover at risk by failing to protect the income they are owed by customers. More than a third of firms (37 per cent) fail to ask customers to sign up to their terms and conditions of sale before supplying goods and services – with a quarter (25 per cent) being under the false impression that including these on invoices amounts to adequate legal protection in the event of a dispute.

Worryingly, two thirds (67 per cent) of firms neglect to state on contracts that goods and services remain the property of the company until invoices are paid – effectively signing ownership over to customers who have not yet paid.

Despite exposing their firms to potential bad debt, 47 per cent of directors confessed to having no proper debt chasing procedures. A further 12 per cent believe that there is nothing they can do if a customer defaults on payment due to cash flow difficulties.

Dominic Offord said: “Almost 1,000 firms a year fail due to bad debt. Yet our research unearthed a somewhat cavalier attitude to debt among firms, with many leaving themselves exposed and very few actively chasing bad debts, when in actual fact various option can be implemented to reduce this risk.”

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Susie Hughes © Hardhatter.com 2006
The Editor

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