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.
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