Organisations undertaking a corporate governance audit and for the utmost peace of mind are also advised to consider whether they could be putting their directors at considerable personal risk in the event of insolvency.
What’s the problem?
The estimated total of 16,502 UK companies to have entered insolvency in 2016 represented a 12.6% rise on the previous year.
This increase was mainly attributable to 1,796 connected personal service companies entering creditors’ voluntary liquidation. However, that still equated to more than 14,700 companies becoming insolvent in 2016 – 0.3% up on 2015, with heightened numbers of both voluntary and compulsory liquidations.
Whenever a company reaches insolvency of any kind its directors are at their most exposed. This is due to two factors, with the first of them being the tendency that insolvency leaves many of a company’s creditors, investors and employees, highly disgruntled and inclined to blame the board for the company’s failure.
Secondly, it is highly unlikely that the insolvent company will have any assets in its possession that would enable it to mount a director’s defence or pay the costs of damages, awards and out-of-court settlements.
Nor are only current directors vulnerable
Many of those requesting a corporate governance audit from us may not be fully aware that it is not only the presiding directors that are exposed if the company enters insolvency.
Any retired director involved in the business before the insolvency – potentially for many years – can also be named in legal action by the aforementioned stakeholders.
There is also an ever-increasing risk of insolvent companies coming under regulatory investigation, at a time when HMRC and OFT seem to be stepping up their efforts to pursue the potentially culpable directors of failed companies.
How can you minimise the risks of getting caught out?
The single best way to ensure you are suitably protected if your company does enter insolvency is to take out directors’ and officers’ insurance.
Legal action of the sort described above can often be covered with by a corporate policy, but this cover may no longer be in place by the time the company reaches the liquidation stage and beyond.
Directors’ and officers’ insurance cover will only be effective if it is in force at the time of a claim being made, which can make it crucial for directors to ensure they have their own personal policies in place. You can rely on such a policy once it becomes likely that your company will enter insolvency, with the assurance of knowing it specifically protects you.
It is obviously not possible to take out such a policy once the company is already in trouble, no more than it is possible to take out a fire insurance policy when smoke is already evident. Directors would be well advised to take steps to have a personal policy in place as a precaution, long before the company’s insolvency is imminent.
Would you like to ensure that your company is continuing to achieve the highest standards of compliance? If you do, don’t hesitate to contact the London Registrars team today for information about a corporate governance audit.