New Laws Increase Risk of Claims against Directors in Insolvency

In one of its last acts before the general election, the last government brought in the Small Business, Enterprise and Employment Act 2015 (SBEE 2015), which introduced a number of new laws spanning corporate insolvency and a diverse range of other areas.

Company directors understand that taking on such a duty comes with legal duties and the requirement to accept responsibility if something goes wrong, particularly in insolvency situations. However, the changes introduced in the SBEE 2015 have raised the stakes a little higher.

In the past, personal claims against directors have not been commonly made, as insolvent companies rarely have the assets they need to pursue litigation. However, recent changes introduced by the SBEE could make personal claims against directors a more regular occurrence in the future.

What changes have been made?

A number of new laws have been introduced which could change the way corporate insolvencies are handled. This includes:

A new route to director liability – The Small Business, Enterprise and Employment Act has been extended to allow the court, when handing down a director disqualification, to also order the directors to pay compensation to the company’s creditors for the conduct in question. In the past, a separate claim would have been necessary.

Extension of right to claim against directors – The SBEE extends the power of company administrators by allowing them to commence claims in cases of wrongful and fraudulent trading by directors.

Sale of claims against directors – The SBEE will also allow insolvency practitioners to assign claims against directors to a third party like employees, shareholders or company creditors. These groups are more likely to have the necessary resources to pursue a claim. This will become a powerful weapon that increases the likelihood of a claim arising against the director of an insolvent company.

Although these aspects of the Small Business, Enterprise and Employment Act will not be introduced immediately, when they do come into force the result we anticipate is a greater number of personal claims against directors being brought.

What does this mean for you and your business?

With the protection of limited liability comes an obligation and responsibility to act in a certain way. Limited liability is not intended to give directors and company owners carte blanche to act without considering third parties such as creditors, shareholders and employees.

In light of the changes, it is now more important than ever before that all directors either in office, or considering taking up office, fully understand their obligations. They should weigh up the risks of their position, and seek to protect themselves wherever they can.

Employees should also be careful when accepting directorships. In some cases, agreements are signed that order individuals into office at struggling subsidiaries or tenuously funded companies. Given the recent changes to the SBBE, its essential employees approach this step up carefully and seek protection from the employer or they could find themselves personally liable for third party claims.

Responsible employers would also be well advised to reconsider their existing arrangements and ensure their office holders are protected as they should be. Legal claims resulting from company insolvencies can continue for a number of years and take their tool on those involved, so it’s essential corporate officers receive the protection they need.

If you’re searching for pre-insolvency advice or assistance, please contact Jameson, Smith & Co. today. We have helped hundreds of company directors with their business debt situations by negotiating Time to Pay arrangements with HMRC and providing expert company rescue advice.

Written by: Mike Smith

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