Wednesday 13 October 2010

Directors pay the price for ignorance warns insolvency lawyer

One of the Midlands’ most experienced insolvency lawyers says that directors of companies in the UK are continually failing to fully understand their duties and this is leading in some cases to dire consequences.

David Ellis, a partner at Higgs & Sons, says the firm is increasingly meeting directors of insolvent companies who are surprised to find themselves made personally liable for their company’s debts when the firm fails.

“Many entirely honest directors whose companies have failed through no fault of their own are finding themselves facing personal liability on two counts,” explains David.

“First, liquidators are challenging directors who have taken their remuneration through dividends rather than as salary. This is often recommended by their accountants to save tax however if the company is failing and there are insufficient profits to justify such dividends then these can be clawed back by the liquidator as illegal payments. Secondly, if it is found that a director has permitted the company to trade on longer than a "reasonable" director would have done, the liquidator can ask him or her to personally make good any losses incurred by the creditors in that period.”

“In addition to being personally liable for these debts, many people are also unaware of the Company Directors Disqualification Act, which can disqualify them as directors for up to 15 years.”

David says that for the companies which are struggling, early legal advice is essential: “Once a company has failed it gives us no comfort to know that in many cases if we had been able to advise the director 12 months earlier he or she should have avoided such difficulties.

“With this in mind we have established a team within the firm to protect directors and advise on ways to limit their exposure. There appears to be a great need for advice which is aimed at directors in these circumstances (and their professional advisers) but which is independent of any advice given to the company itself.”

To contact David telephone 0845 111 5050 or email

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