Why directors can't get away with it

A recent article in the Herald on Sunday (Directors held account for a reason) discusses a couple of cases where directors were found liable for the debts of their companies even though directors guarantees had not been signed. These cases make for interesting reading.

The author, Damien Grant, makes a couple of really valid points which I 100% agree with:

"Many directors take the view that if the business makes a profit they are entitled to the reward and if the business fails then it is the creditors who must shoulder the burden. This is wrong. Creditors do not get to share in the profit of a business so they do not deserve to be unduly exposed to its losses".

It's about time this was pointed out. The number of times I come across companys which are clearly trading whilst insolvent is remarkable. Some directors seem to think it is ok to use their creditors as their bankers, when clearly it is not.

"More often than not, when we investigate a liquidation there is a way to hold a director personally liable. The main reason action is not pursued is the lack of creditor support or the fact that the director has no assets to pursue".

In our experience this lack of creditor support is quite true and is, I believe, due to exorbitant cost of taking legal action. This cost may make the risk of legal action worthwhile if the debt is for say $50,000 but for $1,000, probably not.Yet for a lot of businesses $1,000 is a lot of money. When creditors act collectively then the risk of taking action against debtors is spread amongst the collective and the risk is worthwhile.


WHAT SHOULD YOU DO?


If you get notice that one of your debtors has gone into receivership or liquidation don't walk away for your money. Take the time to ask yourself if you think the directors have realisable assets and if you could form a consortium with other creditors to pursue legal action against the directors. It could be well worth while.

Changes to Credit Reports

The Privacy Commissioner has approved a move to positive, rather than negative credit reporting. Overall we believe this is a good move.

It means that positive information such as You had this loan for $x which was repaid on time will now be held on file, as well as negative information.

Previously the only information held was negative e.g. You had a loan for $x and you had defaulted.

Veda Advantage will also be allowed to keep a record of drivers licence numbers.

What does this mean for you?

1. We believe that as a creditor credit reports will now be far more useful. It's all very well knowing if someone has been default listed in the past (the old leopard doesn't change it's spots type thing), but it is far more useful to know if someone has made commitments in the past and kept them. Over time this will make it more relevant for you to invest in credit reports for your new clients.
2. It would be beneficial to start recording drivers licence details when you get them as identification.
3. You need to make sure you have the correct authorities in place to collect information off your clients. Normally this is part of your terms of trade (see our website for more details) but there are other ways to get your clients authority.

Why did this change come about?

As far as we can tell this change came about because people were complaining that information held on Vedas file didn't relate to them. We can understand this. For example how do you tell one John Smith from another?

The only way to do this is by giving everyone an ID number. As New Zealand does not have a national ID card then the drivers licence is our national ID card by default.

We do feel sorry for those without a drivers licence but no system is perfect.