Higgs & Sons warns directors over their duties

A MIDLANDS insolvency lawyer has said company directors in the region are continually failing to fully understand their duties – leading in some cases to dire consequences.

David Ellis, a partner at Higgs & Sons, said his firm was increasingly meeting directors of insolvent companies who were surprised to find themselves made personally liable for their company’s debts when the firm failed.

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

“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, added Mr Ellis.

He said for many struggling companies, early legal advice was 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,” he said.