Non executive directors warned over insolvency liabilities

A leading North West law firm is issuing an urgent alarm call to non executive directors (NEDs) warning them that their personal assets could be seized by creditors if their company becomes insolvent.

Mace & Jones insolvency unit partner Dominic Vincent issued his plea as experts warn that insolvency figures are set to rise. Nationally, figures show 4,624 companies became insolvent in the three months to the end of September 2009 – a fall of six per cent compared with the previous quarter. But, an estimated 134,000 businesses nationally are still showing “material signs of distress” as falling GDP continues to hit firms.

What is a Non-Executive Director?

A non-executive director (NED) is a member of the board of directors of a company but is not part of the executive management team. A non-executive director is not an employee of the company or affiliated with it in any other way. They contribute to the development of strategy but do not get involved in the nitty-gritty of the business.

Non-execs are the custodians of the governance process and one of the key responsibilities is to monitor the executive team who are running the business day-to-day.

What are the potential liabilities of NEDs?

Mr Vincent said in this climate NEDs cannot afford to ‘coast’ in their roles and he urged them to take a forensic approach to company accounts.

“The business waters have suddenly changed beyond recognition, they are a lot more dangerous and there are many more casualties,” he said. “NEDs cannot afford to ignore those changes and the perilous new dangers. The stark and sobering reality is that if a business is found to be wrongfully trading, that is, allowing the company to carry on trading when the NED knew, or ought to known, that it would go into liquidation then this can lead to personal liability. This is even in a limited liability company when directors normally have no personal liability for the company’s debts. And if the company does not have the assets to pay the creditors, the creditors will come after potentially everything a non executive director owns.”

Mr Vincent said a large number of NEDs are approached towards the end of their career by entrepreneurs, who are still making their money, looking for a wise head to help them.

“Many people take NED roles as part of semi retirement after a successful career,” he said. “It is very flattering and the person can make a genuine contribution for a relatively small return. Many of these NEDs have spent a lifetime grafting, expending blood, sweat and tears on a career and building a solid and solvent home, family life and retirement. All of that is on the line if the business is in trouble and the director does not act in accordance with the law. Remember as a non-executive director you have the same general legal responsibilities to the company as any other director.”

Mr Vincent warned NEDs to seek legal advice if they wanted to remove themselves from their role.

“It is absolutely critical NEDs know precisely how well the business is doing,” he said. “Demand to see regular accounts weekly or monthly and take professional advice if you are concerned about the solvency of the business. Don’t be fobbed off and seek support from other NEDs. If there is a problem, the NED needs to assess the situation and take all steps to minimise potential losses to creditors. But that process is not straight forward and does require expert legal advice.”

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