In association with Quantum
Lee Rhodes, director of Quantum Underwriting Solutions, explains how company directors can find themselves under scrutiny for the way in which they conduct the affairs of the company.
Many boards of smaller companies still don’t feel that the increasingly challenging liability environment affects them; however, company size has no bearing on the duties faced by a director.
Two commonly underestimated areas of exposure are wrongful trading and anti-competitive behaviour.
Insolvency leading to fraudulent or wrongful trading
Directors are personally liable if they allow a company to continue to trade when, to their knowledge, there is no reasonable prospect of debts being paid, either when they are due or shortly after. This is viewed as fraudulent trading, because it amounts to an intention to defraud creditors. Anyone knowingly party to the fraud is liable for the debts of the company without any limit. It is also a criminal offence punishable by up to seven years in prison.
Wrongful trading is when a director of an insolvent company knew, or ought to have known, that there was no reasonable prospect of the company avoiding liquidation and from that point onwards failed to minimise the loss. The penalties are less severe than for fraudulent trading, but not insignificant. And the penalties apply whether the director knew the situation or not – it is judged on whether they should be expected to have the skill and expertise.
It is the responsibility of the liquidator to bring an action and the court can require a director to personally contribute to the assets of the company, which are then made available to creditors.
The punishment for this kind of behaviour is seven years in prison and/or an unlimited fine.
Under the 1998 Competition Act, companies can be fined up to 10 per cent of turnover if found guilty of anti-competitive behaviour. In 2002, the Enterprise Act also made it a criminal offence – punishable by substantial fines and up to five years in prison – for individuals who fall foul of the law.
Directors face imprisonment if they engage dishonestly in price-fixing, market-sharing (where companies agree not to compete by devising how to share customers among themselves), limiting production or supply, or bid-rigging.
As well as an unlimited fine, if a director is found responsible for a breach of competition law, the OFT can apply to the High Court for them to be disqualified from running a company through a Competition Disqualification Order (CDO). The OFT is most likely to do this if a director has been actively and directly involved in the breach of competition law and obstructed any subsequent investigation. The maximum period of disqualification is 15 years.
The IoD recommends that all directors are insured against the risks personally faced in director-level roles. Insurance covers defence costs, awards, damages including out-of-court settlements for these kinds of actions.
IoD members can access discounts on policies from Chubb Insurance and Quantum Underwriting Solutions, the IoD’s preferred providers of directors’ liability insurances.
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The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.