Directors of troubled companies must fulfil their duties to the letter of the law and be able to prove it or face personal liabilities, potential disqualification or even prosecution, warns insolvency specialist R3.
The warning from Mike Pavitt, council member for the Southern and Thames Valley region (including Kent, Surrey, Sussex, Buckinghamshire, Oxfordshire, Hampshire, the Isle of Wight, Dorset, Wiltshire and Berkshire) of R3, the UK’s insolvency and restructuring trade body, comes as businesses continue to struggle against economic volatility.
The number of corporate insolvencies is hitting around 2,000 a month, although the main drivers here are recent changes in the interpretation of some legal duties, innovations in the way claims against directors are pursued, and increased government enforcement activity.
Government agency the Insolvency Service is pushing on with post-pandemic investigations into bounce back and other government-backed loan misconduct, particularly into companies which have become insolvent while still owing repayments.
Mike said: “The goalposts are shifting. Directors who thought they knew how to manage their risk before the pandemic and before recent court decisions need to think again, tighten up their boardroom behaviour and get themselves some refreshed training on where their risks lie.
“One of the biggest reasons directors need to be taking this now more seriously than ever before is that we have now had two massive legal decisions – the 2022 Sequana case which helped redefine directors’ duties during challenging circumstances for companies and this year’s BHS decisions in which former directors were found personally liable in record amounts for what is now being termed ‘misfeasant trading’.
“Directors’ leeway to run their companies as they see fit is being squeezed from all sides as both the law and the policing of that law has changed to raise the standards expected of them.
“The Insolvency Service and Companies House is clamping down on directors as never before, just as the market for claims funders has matured and new, intelligent tools have become available to those responsible for pursuing claims.
“The result is more personal liability risk for directors, and not just for directors of companies which are already insolvent.
“It’s a minefield out there, but help us at hand. Directors who tread with due care and attention and with a guide when needed will be able to navigate the minefield without missing a step.
“It is not the goal of the insolvency profession, the government or laws to stifle business – far from it – but merely to encourage responsible director behaviour and thereby to strengthen investor confidence in doing business here. The economic crisis will, however, claim many more casualties.
“In my experience, a lot of directors are very reticent about putting their hands in their pocket for professional advice, which can be a false economy. Skimping on the cost of a formal liquidation, for example, so you can attempt to quietly dissolve your company is likely to be a bad investment.
“Deciding to answer correspondence from the Insolvency Service, which might lead to disqualification and compensation orders without taking legal advice first, is a similarly bad idea.
“Taking and following professional advice in these situations can offer the directors a good degree of protection.”
Mike explains that there were crucial measures directors of limited companies – the backbone of the UK economy – could take to protect themselves from personal liabilities.
These include being aware of their duties and understanding and staying updated on their legal obligations and responsibilities. They should take professional advice where needed, seeking guidance from financial and legal experts to navigate complex situations.
Directors must maintain clear records of board decisions – even in smaller companies whose minute books may be built up of informal emails and messages – and note any professional advice sought, documenting all decisions and the rationale behind them to demonstrate due diligence.
They should cooperate as fully as possible with an Insolvency Practitioner if they find themselves needing such assistance and engage with insolvency experts to explore options and mitigate risks if facing financial difficulties and external threats.
Mike said: “It is important to remember that while the buck stops with the director, seeking the right advice from regulated Insolvency Practitioners or lawyers at the right time is not the abdication of duty, but the fulfilment of it.”
He adds that directors should be careful to avoid the ‘ambulance chasing’ unlicensed advisors who target businesses in financial difficulty by making false promises, particularly regarding offers to buy business share capital so directors can swerve financial and legal obligations.
Mike’s experience is that this sort of shortcut almost always increases a director’s personal liability risk whilst hitting their pocket with upfront costs which could have been saved by talking to regulated professionals such as R3 members straight away.
The government website has full details of licensed Insolvency Practitioners and the R3 website has a free directory of resources.
