Company directors risking personal bankruptcy over company law

New research reveals that more than half of company directors could become personally liable for their company's debts and risk personal bankruptcy in the event of insolvency - due to ignorance of basic company law.

A survey of 220 senior decision makers in UK companies, contained in law firm Browne Jacobson’s Sleepless Report, polled directors on their awareness of the basic aspects of company law.

The majority were found wanting in three crucial areas: insolvency, limited liability and debt.

Insolvency Ignorance

52% of directors were ignorant of their company’s procedures to avoid trading while insolvent.

More than a quarter (26%) of directors admitted that their company had no process in place to avoid trading while insolvent. A further quarter (26%) of business leaders were unsure of whether or not their company had such procedures.

Continuing to operate while insolvent may expose directors to personal liability for wrongful trading.

When asked about their responsibilities as a company director, just 41% of directors were aware that their duty in the event of insolvency is to act in the best interest of the firm’s creditors.

Half of directors believed that their duty was to act in the interest of the company, 5% the bank, and a rogue 4% believed that they should act in their own interest!

Failure to act appropriately in these circumstances may 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, claims for wrongful trading and even personal bankruptcy.”

Limited Liability?

Browne Jacobson’s Sleepless Report also reveals that up to one third (32%) 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 small value contracts.

In reality, directors need to carefully consider the company's exposure to claims on all contracts and the extent of insurance cover required.

Bad Debt

Companies are also failing to protect the money they are owed by customers, thus exposing themselves to potential cash flow problems which could threaten the survival of the business.

More than a third of firms (37%) fail to ask customers to sign up to their terms and conditions of sale before supplying goods and services – with a quarter (25%) 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%) 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% of directors confessed to having no proper debt chasing procedures. A further 12% believe that there is nothing they can do if a customer defaults on payment due to cash flow difficulties.

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